1.The history and current situation of international copper futures trading. 

(1)Background of International Copper Futures Market

The London Metal Exchange was born out of the industrial revolution in Britain. Britain was a major producer of copper and tin centuries ago.

In the early 19th century, Britain was self-sufficient in copper and tin, so prices were fixed for a long time. But the Industrial Revolution in the 19th century led to a surge in demand for metals in the UK, with consumption far outpacing production, leading to massive metal imports, a rapid expansion of the metals trade in the UK, and large movements in metal prices.

Metal Traders face a serious problem: they buy copper and tin raw ore and concentrates from as far away as Chile and Malaysia, without knowing the price of the metal when the ship arrives in Britain a few months later; Importing large quantities of metal ore by sea poses great risks to traders and consumers. However, trading and pricing were random, shipping times were uncertain, information was scarce and there was no formal commercial market. Two external factors changed the situation: the steam engine for shipping and the Telegraph. This allows one to estimate the time of the ship's departure and to get information about the ship and cargo before they arrive in London. So London's metal merchants began to gather in the city's cafes to forward incoming shipments and pre-sell a certain number on a certain date to prevent losses from falling prices.

The opening of the Suez Canal in 1869 reduced the time it took to ship tin from Malaysia to Britain to three months, matching the three months it took to ship copper from Chile to Britain. This has led to the LME's unique three-month contract structure, where each day has an expiration date. In order to meet the growing demand of British Industry, more and more merchants are attracted to deal with the increasing quantity of metal delivered. So you need to find a place where you can get together and do business on a daily basis.

The London Metal Exchange Company, the brainchild of the modern London Metal Exchange, was set up in 1877, above a hat shop in Lombard Court, to deal exclusively in metals. Since then, copper futures have been traded.

Currently international copper futures trading in addition to the LME, there is the New York Mercantile Exchange (Nymex) branch. Both are known as the world's No. 1 and No. 2 Copper Exchanges.

From 1990 to 2000, the number of LME transactions increased fourfold, from L3 million in 1990 to 66 million in 2000. The number of LME transactions decreased to 59 million in 2001. In 2003, the total number of LME transactions for six metal varieties reached 63,516,698, of which 19,437,740 were for copper. Copper was the most traded LME product before 1997, when aluminium replaced copper as the most traded product. Aluminium and aluminium alloys have accounted for about 40 per cent of all LME contracts traded in recent years, while copper has accounted for more than 30 per cent.

On the premise of following the basic principles, the development of International Copper Futures Market after 1990s presents some new characteristics:

First, the main market changes, funds, banks to become an important participant in copper trading.

In the nearly 100 years since the establishment of the Non-ferrous metal, the main body of copper trading in the international market has mainly come from the spot market, that is, from the relevant production, consumption and circulation enterprises. In the 1990s, besides the large production and consumption circulation enterprises which were still the main participants in the market, the participation of funds and banks injected new vitality into the market, this led to a jump in copper trading after the 1990s.

Copper companies have been the mainstay of LME futures trading. LME contracts, pricing mechanisms and clearing systems are well suited to the trading needs of copper companies because their business matches the cash and cash flows of the LME and LME members can offer credit lines to their customers. As a result, copper producers, consumers and traders around the world are all participating in the LME market to varying degrees.

It is legal for banks to trade on the LME, as they are in other markets. Banks'participation in LME transactions is of three kinds: first, it is closely related to the financial activities of companies. Mining companies apply for loans from banks, which generally do not grant loans if the mining companies do not preserve their value, so most major banks have established commodity divisions to advise clients on preservation schemes. The second is that the banks themselves are involved in futures trading. Because banks lend money to new mines, as a form of repayment, they get a certain percentage of the expected metal output. As a result, part of the financial risk that banks face translates into price risk for metals, which they reduce by locking in prices by selling forward contracts on the LME. When the metal is produced, the banks will sell it through agents and liquidate the LME positions. Third, because LME warehouse receipts are so liquid, banks are using the metals market as a place to invest and raise capital.

Since the 1990s, the degree of the Fund's participation in commodity futures trading has greatly increased, and copper has become an important part of the fund's portfolio because of its "hard currency" and its high relevance to the economic situation. The operation of the fund has become an important factor in the analysis of copper price trend.

2. Futures and options trading develop together

Based on the introduction of copper futures contracts, the LME has introduced Traded Options and Traded Average Price Options (Tapos) to meet the needs of the market and provide participants with more and more effective hedging tools. Tapos contracts are based on the Monthly Average Settlement Price (MASP) of the LME.

Since many users in the industry price their physical commodities on the basis of the LME's Masp, brokers develop non-exchange average-price products, commonly referred to as "Asian" options, such contracts quickly became popular, especially among big producers. To meet this demand and gain market share, the LME has developed the TAPOs contract.

The Tapos contract complements existing LME futures and options contracts. Market participants using MASP tend to use TAPOs contracts, while other hedgers still tend to use futures or options contracts.

The trading volume of LME's general options contracts is equivalent to 7% of futures contracts. Although the trading volume of options is insignificant compared with the trading volume of futures contracts, the existence of options trading mechanism further promotes futures trading, market participants can make full use of futures contracts and options contracts of different combinations, according to their own needs to build a unique hedging strategy or portfolio.

2. The history and present situation of copper futures trading in China 

(1)The background of Non-ferrous Metal Futures Market in China.

After the reform and opening up, with the planned economy gradually transformed into a market economy, the market mechanism and market system also gradually formed. According to the market price the product range expands unceasingly, the price appears the big fluctuation, the production and the circulation does not suit. In order to find an effective way to solve this problem, on the basis of exchanging experience of economic development with foreign countries, especially the experience of Western developed countries in the rational allocation of resources by market mechanism, the leaders of the CPC Central Committee and the State Council have successively made important instructions and decided to study the foreign futures system. On March 25,1988, Premier Li Peng pointed out in his "report on the work of the government" that "we should speed up the reform of the commercial system, actively develop all kinds of wholesale trade markets and explore futures trading, " thus establishing a new subject for the study of the wholesale futures market in China.

In accordance with the spirit of the central leadership, the Development Research Center of the State Council and the State Commission for the reform of the system have set up a special research group on the futures market to study and prepare for the trial of the futures market. The Futures Market Research Group has systematically studied the historical experience of foreign futures markets, focusing on the historical conditions and specific practices, experiences and lessons of futures trading in some countries, foreign experts will be invited to consult on the trial futures market. Through the research, it lays a certain theoretical foundation and discusses a series of problems of trial-run futures market in China according to the national conditions. Considering that under the conditions at that time, our country should vigorously develop the secure forward contract transaction, standardize the forward contract with the futures mechanism, take the transformation of the wholesale market as the starting point, and combine with the establishment of the wholesale market and the rectification of the market order, establish a futures market with strict regulations and convenient trading.

After much deliberation, it was decided to start with agricultural products. In 1990, the Zhengzhou Grain Wholesale Market (the precursor of the later Zhengzhou Commodity Exchange) was set up and trading of forward contracts for agricultural products began.

The Non-ferrous metal market was created in this context. The reform of the price of Non-ferrous metal started early, and was basically carried out in the ten years after the establishment of the Non-ferrous metal, which experienced the process of giving priority to regulation, combining regulation with regulation, and giving priority to regulation and moving towards the market. The marketization of the Non-ferrous metal price is the foundation of the Non-ferrous metal market. The marketization of prices will inevitably bring about price fluctuations, coupled with the market disorder in the period of economic transition. Therefore, at the meeting to discuss the reform of the material circulation system, experts, academics and leaders are calling for a regulated Non-ferrous metal as soon as possible.

China is an important Non-ferrous metal trading country, and some large import and export companies have been involved in futures trading on the international market since the early 1980s; they have brought in futures experts from abroad to teach futures theory and practice, thus triggered the establishment of the relevant departments of the Non-ferrous metal futures market.

The Non-ferrous metal was created to bring order to the market. When the price was just liberalized, the colored market was in a state of "disorder" , which was manifested in the following aspects: the enterprises' autonomy over their products was very small, and the buyers and sellers were out of position; the double-track system of price could not reflect the effective demand of the market, it can not reflect the law of the value of commodities, the competition for raw materials is fierce, non-ferrous processing enterprises are on the verge of being shut down and awaiting materials, the market circulation system is chaotic, and "triangular debts" are common, etc. , this situation has attracted the attention of many domestic economists and Non-ferrous metal workers, and put forward a lot of ideas to the non-ferrous Corporation, the relevant departments of the state. One of the best examples of this is the Non-ferrous metal. At that time, Shenzhen was at the forefront of the market economy, market system, market mechanism is relatively complete, so it became the Non-ferrous metal chose to establish an important area of the metal market.

Under the guidance of the State Physical Reform Commission, the Development Research Center of the State Council and the State Administration for Industry and Commerce, and under the leadership of the Shenzhen municipal people's government, the Non-ferrous metal was established on June 30,1991, with the joint investment of the non-ferrous Shenzhen United Company and the non-ferrous Supply, marketing and Transportation Corporation under the Non-ferrous metal, the forward trading of copper, aluminum, lead, zinc, tin and nickel was initiated, marking the formation of China's Non-ferrous metal futures market.

Six months after the establishment of the Non-ferrous metal, the former Ministry of materials and the Shanghai Municipal People's Government jointly submitted to the State Council the request for a trial run of the Non-ferrous metal, this paper states the necessity, basic conditions, basic train of thought and preparation progress of the trial-run exchange. On May 28,1992, with the approval of the State Council, the Shanghai Futures Exchange grand opened for business, listing six basic metals, copper, aluminum, lead, zinc, tin and nickel, starting from the medium and long term contracts. From March 1993 to November 1993, copper, aluminum, lead, zinc, tin and nickel futures standard contracts were launched, and futures trading of 6 basic metals was really started.

(2)The evolution of China's Non-ferrous Metal Futures Market Shanghai Copper 

Trading started later than Shenzhen, but trading volume soon greatly exceeded Shenzhen. The success of the Shanghai and Shenzhen Metal Futures Markets has attracted a number of provincial and municipal leaders to visit the markets and set off a wave of Non-ferrous metal. After Shenzhen and Shanghai, Shenyang, Tianjin, Chongqing, Chengdu and other places have also set up exchanges to carry out futures trading of Non-ferrous metal. Copper has become one of the common trading varieties of these exchanges, but the regional segmentation goes against the characteristics of exchange-scale trading. The trading of copper in these new exchanges is relatively low, and the futures market can not function well. The State Council began to clean up China's futures market, which is booming on the surface but facing many problems on the ground. Since 1995, China's futures market has undergone two major structural adjustments, the first in 1995-1996 and the second in 1998-1999. In 1995, the CSRC began to reorganize the domestic futures exchanges and re-examine the agency qualifications of brokerage firms and part-time institutions. With 15 of the 40 futures exchanges remaining as a pilot, Shanghai Futures Exchange is one of the 15. In 1998, after the domestic commodity futures market experienced ups and downs, the management once again carried on the structural adjustment to the futures market. The main elements of this adjustment are: Exchanges from 14(one was abolished in 1996) to 3, listed varieties to retain 12(copper is one of them) , the minimum amount of registered capital of brokerage firms from 10 million to 30 million. In this adjustment, the Shanghai Futures Exchange merged with Shanghai Commodity Exchange Xin and Shanghai Grain and oil exchange into Shanghai Futures Exchange, and nine exchanges, including Shenzhen, Chongqing, Shenyang, Chengdu and Tianjin, were canceled, shanghai Futures Exchange also became the only domestic copper futures trading exchange.

(3) From 1992 to 2004, the 12-year history of China's copper futures trading can be divided into four stages

 the first stage is called "rapid rising period" (1992-1994) , the second stage is called "recession stage" (1995-china 1997) , the third stage is called "recovery stage" (1998-china 1999) , and the fourth stage is called "lock stage" (2000-2004) . Stage one -- high-speed ascent (1992—— -- 1994) : Copper prices have soared, trading volumes are as high as copper, and futures trading seems to have quickly become accepted as a new phenomenon. At this time the main participation in the copper market from the non-ferrous industry and circulation areas, institutional investors accounted for more than 90% , the participation of individual investors and the proportion is very small. Phase II -- Recession (1995 -- China 1997) : Copper prices have fallen from their highs, still volatile, but trading volumes have slipped. The reasons are as follows: First, the emergence of some highly speculative futures has attracted a large number of funds, copper as a closely related to the international market, by the impact of the international market prices, domestic market to become the shadow of the international market, less independent market, which for some focus on speculation, speculation participants lack of attraction. Second, the futures market began to rectify, a number of part-time institutions gradually withdraw from the market. Third, affected by the negative impact of other varieties of futures industry, the Community of the futures industry on the misunderstanding, many investors do not dare to participate in trading. STAGE III -- a rebound (1998 -- 1999) : After the first phase of consolidation, some investors have stumbled on other varieties, recognising the normalisation of copper and returning to the market. In 1998, according to the circular of the State Council on further rectifying and standardizing the futures market (No. 27[1998] of the State Council) , the CSRC reduced the number of futures from 35 to 12 and cancelled 23. Copper is one of only six copper varieties that are actually traded, although the 12 varieties are retained, and its regulated operation is beginning to gain market recognition, coupled with the fact that the Shanghai Futures Exchange is the only one listed in copper, the trading volume was increased from the original basis. The fourth stage —— The stage of steady development (from 2000 ~ -- 2004 to the present) : the cleaning and rectification of futures market is basically over, and it begins to step into the stage of normative development. This period copper trading volume rose sharply, the annual increase rate of more than 40% , the position jumped to a new level, fully shows the size of the market expansion. The main reasons are as follows: First, the exchange has strengthened publicity, investors and the public have been corrected for the understanding of futures trading, realize that futures trading is one of the investment channels. Copper has always been recognized as the most mature and standardized variety in the industry. In the past, the exchange paid more attention to the promotion of the value-preserving function of copper. In the last two years, on the basis of this, the exchange paid more attention to the promotion of the idea that copper is a good investment variety, seminars and presentations were successfully organized and co-organized and investor education was enhanced. In all efforts, copper is a good investment in the concept of the basic recognition of the market. Second, the equity market downturn has provided opportunities for futures markets. At the beginning of 2001, the stock market lingered, the problems gradually exposed, the tone of management to strengthen supervision became more and more obvious, indicating that the prosperity of the Chinese stock market came to an end and began to enter a period of adjustment. Under the situation that the profit opportunity of investment securities market is greatly reduced, the fund needs to look for the new investment direction. The advantages of two-way futures trading fully reflect the investment value of copper, become the first choice of sound investment institutions to participate in futures trading, and its funds gradually flow into the copper market. Many of these funds are involved in cross-term and cross-market arbitrage of copper for the purpose of obtaining risk-free returns. Third, with China's smooth accession to the WTO, the degree of marketization has further improved, the risks faced by enterprises have increased, and the demand for avoiding risks has increased. In order to ensure the stability of production and operation and to enhance market competitiveness, more and more enterprises participate in futures hedging trade consciously. Fourth, the extent to which individual investors participate in copper trading has increased dramatically. The proportion of individual investments has risen from less than 10 per cent before 1994 to more than 80 per cent today, and the share of transactions has risen from a negligible proportion to more than 50 per cent. The involvement of incremental investment funds, enhanced the liquidity of the market, greatly active in the copper trading, leading to a significant increase in trading volume. Looking at the situation of copper futures trading in China in recent years, we can see the following characteristics: First, large-scale copper production enterprises, consumer enterprises, circulation enterprises (including import and export companies) have been the backbone of the market, they take the hedge and the arbitrage primarily, has played the positive role for the stable market, the enhancement market confidence. Second, the domestic copper market and the international market are closely related to the market size, trading is difficult to be manipulated. Third, the proportion of speculative trading, short-term trading showed an upward trend.

(4)The function of copper futures market in China and the most prominent 

economic function of futures market —— -- Price Discovery and hedging are fully embodied in copper futures market. Price discovery refers to the gathering of a large number of buyers and sellers in the futures market, and the price formed by their concentrated bidding can reflect the future price trend of commodities, thus providing price reference for producers and operators. Hedging refers to that an enterprise can avoid the price risk of the spot market by operating in the same and opposite direction with the spot position in the futures market. The performance of these two economic functions must be based on standardized and transparent market, and the futures price must be closely related to the spot price. A Correlation Coefficient of 0.97 was found between the spot price and the closing price for Shanghai Futures Exchange, the high correlation between futures prices and spot prices indicates that futures prices can reflect the trend of spot prices, for production, consumption, circulation enterprises through the futures market hedging to avoid the spot market risk provides a strong guarantee. The price discovery function of the copper futures market is mainly manifested in the following two aspects: First, the former China national nonferrous industry corporation and the State Planning Commission have issued documents successively since 1995, copper prices allocated to defense, defense, and other industries are marked down by a percentage based on the weighted average of the Shanghai Futures Exchange settlement price in the first week of each month. Second, to promote the formation of non-ferrous industries market-oriented pricing system. The futures price of copper on the Shanghai Futures Exchange has become the pricing benchmark for spot sales, raw material procurement and trade by enterprises at all levels of production, consumption and circulation, covering 98% of the country. The function of copper futures market is embodied in the following aspects: First, the production enterprise guarantees the product profit and the loan timely recovery through the futures market. Second, consumer enterprises through the futures market to ensure the source of raw materials, the quality of raw materials, locked in the cost of raw materials;. 3. Circulation enterprises have increased the speed of circulation of goods and materials through the futures market, expanded business channels and ensured trade profits. The development of the futures market has brought profound changes to the entire copper industry. At the same time that the Shanghai Futures Exchange has become the world's third largest copper trading market, the copper industry has also grown from a closed industry to a fairly high level of marketization, so that it will not be affected by any impact upon its accession to the WTO. The futures market provides a strong guarantee for the stable and long-term development of enterprises. Driven by the futures market, the reputation of the copper industry has been greatly improved. The establishment and development of Non-ferrous metal futures market, represented by copper, has had a profound impact on the non-ferrous industry and non-ferrous enterprises. Whether non-ferrous large enterprises can effectively maintain their value in the futures market has become the core competitiveness of enterprises, and the cost control of non-ferrous enterprises are linked to the futures market. In the non-ferrous industry of listed companies, each of them have to carry out information disclosure, explain how to carry out hedging, as well as hedging effect and efficiency. At the same time, under the influence of the futures market mechanism, the risk control level of non-ferrous enterprises is quite high, and the risk is the core of management. China's Non-ferrous metal market is a transitional economy built on the basis of an underdeveloped spot market. From the practice of copper market, the spot market is the basis of the development of the futures market, while the futures market will promote the development of the spot market. 

Source: Poker investor

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