By Pratima Desai and Siyi Liu

LONDON/SINGAPORE (Reuters) – China is taking steps to influence the pricing of industrial metals it produces and consumes. This includes attracting foreign firms to trade on Shanghai's futures exchange, potentially fragmenting global markets.

After acquiring mining assets globally over the past two decades to secure necessary metals and meet carbon emissions targets, China seeks a greater role in price determination.

However, it has lost significant market share in metals futures trading and must encourage international investors to engage with the Shanghai Futures Exchange (ShFE). Interviews with over ten industry insiders indicate that a successful shift could give Shanghai's contracts benchmark status, disrupting the reference price system established by the London Metal Exchange (LME) since 1877.

ShFE's benchmarks would allow Chinese firms to create contracts without linking to LME prices while requiring foreign participation to influence reference prices, thus shifting market power from the West to China.

Recently, the exchange stated its plans to attract foreign investment, emphasizing a focus on cross-border delivery capabilities. A crucial step involves establishing warehouses outside China for copper contracts launched in 2020.

ShFE aims to compete with the LME's extensive network of warehouses by setting up international metals storage, starting in Singapore, where regulatory frameworks already exist.

Despite China consuming over half of the world's copper, aluminum, and zinc, the Shanghai exchange faces a challenging path against the LME, which stabilizes significant trading volumes of copper futures. ShFE's global market share has dropped to approximately 15% for copper futures, down from challenges posed by US-based COMEX.

For ShFE, the key to increasing trading volumes lies in greater international participation, backed by the Chinese government. Despite regulatory hurdles and concerns about China's market intervention policies, ShFE aims to enhance its position in the global metals market.

LME is also exploring opportunities for collaboration and innovation with ShFE, indicating potential changes in the competitive landscape.

Overall, enhancing ShFE's relevance on a global scale is a longstanding goal, but challenges surrounding currency conversion and market volatility remain significant hurdles to its ambitions.