The Daily Update - Crude and Raw Platforms

Earlier this year China launched a renminbi-denominated crude futures exchange in Shanghai as a means to internationalise the renminbi by delivering international investors a means by which to trade oil futures contracts without the need for offshore operations and dollar denominated transactions. With the Trump-administration looking inward, China has been taking the opposite approach and with this and its more recent venture could indirectly help commodity based nations like Venezuela and Iran overcome some sanction pain, and itself mitigate possible trade conflict effects with the US.

In addition to the Shanghai International Energy Exchange (INE), last week China opened up an iron-ore futures trading platform, Dalian Commodity Exchange (DCE),  whereby offshore investors can directly trade Dalian iron-ore futures; as opposed to previously having to access the futures market through Chinese entities. Brazil’s Vale, the largest producer of iron ore and nickel worldwide, has been a big supporter of the platform having dealt with China for over 45 years. Interestingly, Dalian oil futures are the most liquid raw-steel derivatives, with ~33bn tonnes of volume traded last year, roughly 20 times total global iron ore trade. China is the world’s largest buyer and consumer of iron ore; last year it imported a record 1.075bn tonnes.

With a share of the trillions of dollars traded through these aforementioned instruments globally, along with the opening up of China’s financial markets to foreign participation could at some stage call to question the dollar’s reign; with the renminbi expected to be more widely held globally. It is therefore quite clear to us that having exposure to the renminbi, for any investor, should be a consideration; especially as the internationalisation of the currency marches on.

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