Innovation and Transformation of China’s Copper Futures Market Dr. Chu Juehai, Executive Vice President,

Shanghai Futures Exchange November 20, 2013

LOGO

Main contents

LOGO

I. Analysis on the Macroeconomic Situation of China and the world

II. Status Quo of China’s Copper Industry III. Operation and Development of China’s Copper Futures Market

IV. Innovation and Transformation of China’s Copper Futures Market

LOGO

Part I Analysis on the Macroeconomic Situation of China and the World

-2.00

-4.00

-6.00 4.50 4.00 3.50 3.00 2.50 2.80 2.00 1.50 1.00 0.50 0.00

2013/09

2013/05

2013/01

2012/09

2012/05

2012/01

2011/09

2011/05

2011/01

2010/09

2010/05

2010/01

2009/09

2009/05

2009/01

2008/09

2008/05

11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00

2013/07

2013/04

2013/01

2012/10

2012/07

2012/04

2012/01

2011/10

2011/07

0.00

2011/04

2.00

2011/01

4.00

2010/10

6.00

2010/07

8.00

2008/01

2013/09

2013/05

2013/01

2012/09

2012/05

2012/01

2011/09

2011/05

2011/01

2010/09

2010/05

2010/01

2009/09

2009/05

2009/01

2008/09

70.00 65.00 60.00 55.00 50.00 45.00 40.00 35.00 30.00 25.00 20.00

2010/04

Actual quarterly GDP growth rate in the U.S.

2013/07

2013/03

2012/11

2012/07

2012/03

2011/11

2011/07

2011/03

2010/11

2010/07

2010/03

2009/11

2009/07

2009/03

2008/11

2008/07

2008/05

PMI index of new orders in the U.S. manufacturing sector

2010/01

-8.00 2008/03

2008/01

U.S. Economy strongly recovering LOGO

Monthly unemployment rate in the U.S.

7.20

CPI of the U.S.(%)

1.20

QE policy and the exchange rate of U.S. dollar The expectation and delay of QE tapering affect the currency trend of U.S. dollar.

86 84 82 80 78 76 74 72 70 68 66

LOGO

The U.S. dollar index

The dollar /Renminbi exchange rate The RMB keeps appreciating sharply. At the end of October, it reached 6.1, the newest low after the foreign exchange reform.

6.8 6.7 6.6 6.5 6.4 6.3 6.2 6.1 6 5.9 5.8 5.7

6.092

LOGO

The European economy recovers slowly  The European PMI index level has been low for 4 consecutive months under 50 points boundary line.

65.00

PMI index of new orders in the European manufacturing sector

60.00 55.00

51.30

50.00 45.00 40.00 35.00 2013/10

2013/07

2013/04

2013/01

2012/10

2012/07

2012/04

2012/01

2011/10

2011/07

2011/04

2011/01

2010/10

2010/07

2010/04

2010/01

2009/10

2009/07

2009/04

2009/01

2008/10

2008/07

13.00

12.20

12.00 11.00 10.00 9.00 8.00 7.00 2013/07

2013/04

2013/01

2012/10

2012/07

2012/04

2012/01

2011/10

2011/07

2011/04

2011/01

2010/10

2010/07

2010/04

2010/01

2009/10

2009/07

2009/04

2009/01

2008/10

2008/07

6.00 2008/04

On November 7, 2013, the European Central Bank cut interest rates by 25 basis points to a record low, supporting the ailing euro zone economic recovery.

Unemployment in Europe(%)

2008/01

European unemployment remains high, restricting the pace of the economic recovery in Europe.

2008/04

2008/01

30.00

China’s Economy: stabilizing the growth, adjusting the structure China's manufacturing PMI index has been more than the 50 points for 13 consecutive 70.00 months. 65.00

2013/10

2013/07

2013/04

2013/01

2012/10

2012/07

2012/04

2012/01

2011/10

2011/07

2011/04

2011/01

2010/10

2010/07

2010/04

2010/01

2009/10

2009/07

2009/04

2009/01

The monetary policy by the central bank is stable. The M2 growth has been 13-15% yearon-year.

2008/10



2008/07

The overall level of prices is within control.

60.00 55.00 50.00 45.00 40.00 35.00 30.00 2008/04



PMI index of new orders in China’s manufacturing sector

2008/01



LOGO

Year-on-year M2 growth

China CPI level (%) 35.00

7.00

30.00

6.00

25.00

5.00

20.00

4.00

15.00

3.00

10.00

2.00

5.00

1.00

2013/09

2013/05

2013/01

2012/09

2012/05

2012/01

2011/09

2011/05

2011/01

2010/09

2010/05

2010/01

2009/09

2009/05

2009/01

2008/09

2008/05

2013/10

2013/07

2013/04

2013/01

2012/10

2012/07

2012/04

2012/01

2011/10

2011/07

2011/04

2011/01

2010/10

2010/07

2010/04

2010/01

2008/01

0.00

0.00

Analysis of the macro economic situation

LOGO

 Economic cycle: inconsistency, slowness and long-term of the economic recovery;  Industry cycle: expansion of production capacity, excess production capacity and delay of the economic effect;  Commodity attributes and financial attributes: alternativity and uncertainty

 Enterprise development needs to pay attention to the combination of futures market, enhancing the core competitiveness and practicing the “inherent" strength.

LOGO

Part II Status Quo of the Development of China’s Copper Industry

China has become the biggest country of nonferrous metal production and consumption

LOGO

Year 2012

Copper (10Kton)

Aluminum (10kton)

Lead (10kton)

Zinc (10kton)

Output in China

606

1988.3

464.7

484.5

Imported

340

51.8

0.7

51.4

Output of the world

1986.9

4715.4

1053.4

1261.2

Ratio of China output accounting to the World output

30.5％

42.2％

44.1％

38.4％

Source: National Bureau of Statistics, CRU

In 2012, the consumption of refined copper in China was 8.17 million tons, accounting for more than 40% of the world.

Copper smelting capacities in different regions of the world

LOGO

全球分地区铜冶炼产能（2011:2015） Copper smelting capacities in different regions of the world 2011 : 2015 1400 1177

1200

10K 万吨ton

1000

904

800

690 690

600 404 396

400 200

247 256 88 107

137 140

0 Africa 非洲

North America 北美

South南美 America

2011

Source: International Copper Study Group

Asia 亚洲

2015

Europe 欧洲

Oceania 大洋洲

Fixed asset investment and capacity expansion of China's copper industry  

Fixed asset investment growth continued to slow down: investment peak has passed; the peak of putting into operation lags behind. From January to August 2013, the fixed assets investment in China’s copper smelting industry reached RMB15.3 billion, decreasing by 1% compared to the same period of last year; At the end of 2013, China's refined copper production capacity exceeded 8 million tons. The newly added capacity of copper in 2013 is about 1 million tons, including Tongling, Daye, YunXi, Zijin, Dongying Fangyuan and other new expansion projects.

投资额(亿元) Amount of investment (RMB100 million) 800 700 600 500 400 300 200 100 0

同比增速(%) 100 Growth rate (%) 80 60 40 20 0

20 2008. 2008.2 20 4 20 0088.6 2008. .8 0 1 208.10 2009.2 2009.3 20 5 20 0099.7 0 . 209.1 9 2010.1 2010.2 21 4 20 0100.6 2010. .8 1 200.110 2011.2 2011.3 1 5 2020111.7 1 201.1.9 2012.1 2012.2 21 4 20 0122.6 2012. .8 1 1 202.10 2013.2 13 3 .5



LOGO

Amount of fixed assets investment in the mining and beneficiation of non-ferrous metals (RMB100 million) 有色金属矿采选业固定资产投资额(亿元) Amount of fixed assets investment in the smelting and rolling processing of non-ferrous metals (RMB100 million) 有色金属冶炼及压延加工业固定资产投资(亿元) Y-O-Y growth rate of accumulative fixed assets investment in the mining and beneficiation of non-ferrous metals (%) 有色金属矿采选业累计固定资产投资同比增速(%) Y-O-Y growth rate of accumulative fixed assets investment in the smelting and rolling processing of non-ferrous metals (%) 有色金属冶炼及压延加工业累计固定资产投资同比增速(%)

Data source: Industrial database of China Economic Net

The degree of industrial concentration increases, a long way to go for capacity control

LOGO

 Industrial concentration of China’s refined copper  The industrial concentration of the top 5 copper producers (Jiangtong, Tongling, Jinchuan, Daye, Yuntong) in China accounts for about 60%.  12th Five-year development plan of non-ferrous metal industry  The output of refined copper shall be controlled within 6.5 million tons per year. The concentration of the top 10 producers shall be at 90%.  The output of refined copper in China in 2012 was 6.06 million tons. Vs The control target of that in 2015 is 6.5 million tons.

China's refined copper consumption structure

LOGO

 In 2013, the domestic refined copper consumption demand increases slightly. The copper consumption demand has been increased.  Consumption growth rate is lower than the growth rate of capacity and output. The market gradually transforms from the previous “demand is greater than supply” to the slightly excess in the supply;

2012 (10KT)

2013F (10KT)

Increase rate (%)

Electric power

363

395

8.8

Air conditioning and refrigeration

116

122

5.2

Communication and transportation

79

81.5

3.2

Electronic

57

60

5.3

Building industry

70

72.5

3.6

Others

83

86

3.6

Total

768

817

6.4

Data source: Antech

China’s non-ferrous metals industry profit rate remains in the doldrums Operating profit rate of China's non-ferrous metal industry in 2013 is 2.2% - 2.3%, far lower than the bank loan interest rate.

Sales profit ratio

Data source: National Statistics Bureau

LOGO

China copper industry operating profit growth slows down Total profit

LOGO

Jan-Sept, 2011

Jan-Sept, 2012

Jan-Sept, 2013

Increase or decrease Y-O-Y

1169

787

775

－1.4％

Copper smelting

174

98

51.9

－47％

Lead & zinc smelting

32.4

2

3.9

——

Aluminum smelting

116

－18

－7.8

——

Non-ferrous metal smelting and rolling processing industry

Data source: National Statistics Bureau

Other features of China’s Copper industry

LOGO

The prices of main byproducts - gold and silver of the copper smelting industry in 2013 sharply fell, below 1,200 U.S. dollars/ounce and 20 U.S. dollars/ounce respectively. In 2013 the domestic sulfuric acid price continues to fall. The sulfuric acid average price at the first 3 quarters is RMB313/ton. It fell to the lowest points, RMB50-60/ton in the northwest area. The long-term order of the copper concentrate processing increases year by year. Will it reach the 100 U.S. dollars/ton or not? Let’s wait and see.

 



TC/RC Long-term order of China’s Copper concentrate (US dollars per ton) 120

100？

100 80 60 40 20 0 2005

2006

2007

2008

2009

TC/RC -- TC (treatment charge); RC (refining charge)

2010

2011

2012

2013

2014

LOGO

Part III Operation and Development of China’s Copper Futures Market

LOGO

Scale of China’s Copper Futures Market



2001—2012年中国铜期货品种市场规模

2001-2012 Scale of China’s Copper Futures Market 9000

180000

8000

160000

7000

140000

6000

120000

5000

100000

4000

80000

3000

60000

2000

40000

1000

20000

0

0 2001

2006

2007

2008

Trading Volume 成交量(万手) (10k contracts)

2009

2010

2011

Trading Turnover (RMB100million) 成交金额（亿元）

Data source: Shanghai Futures Exchange, unilateral statistics

2012

成交金额 Turnover Trading



By the end of October 2013, the total volume of the Shanghai Futures Exchange is 540 million contracts (unilateral), and the total turnover is RMB50.9 trillion, exceeding the total volume of 370 million contracts and total turnover of RMB44.5 trillion in 2012. From January – October 2013, the volume of SHFE copper futures reached 56.46 million contracts, increasing by 11.2% compared to last year; the turnover reached RMB14.73 trillion, increasing by 1.42% compared to last year. In 2001, the SHFE copper futures volume was 4.02 million contracts, with the turnover of RMB0.32 trillion.

volume Trading 成交量



Shanghai and London Copper Futures Prices highly correlated

LOGO

 The correlation coefficient between SHFE and LME copper futures contracts is as high as 98% for 3 consecutive months.

Trend of SHFE and LME copper prices in consecutive three months 80000

12000

70000

10000

60000 8000

50000 40000

6000

30000

4000

20000 2000

10000 0

0

SHFE SHFE铜 Copper

LME LME铜 Copper

Data source: Shanghai Futures Exchange, Reuters

The convergence of the SHFE copper futures and spot market price  

LOGO

In recent years, the convergence rate between the settlement price of the copper futures contract and the spot price of SMM is as high as 99%. Shanghai non-ferrous metals futures prices can timely reflect the change of the domestic supply and demand relations, becoming the basis for pricing the domestic spot trading activities. 2000

Difference between spot price and 现货价与结算价之差 settlement price

1500 1000 500 0 -500

Basis difference= spot price – futures prices Convergence rate of due price= (1- the absolute value of the due basis difference / spot price) ×100％ Data source: Shanghai Futures Exchange, SMM

20100816

20100517

20100209

20091116

20090817

20090515

20090216

20081117

20080815

20080515

20080215

20071115

20070815

20070515

20070212

20061115

20060815

20060515

20060215

-1000

Customer structure of the SHFE copper futures investors continuously optimized

LOGO

 Compared with the personal investors, the ratio and quantity of the corporate customers gradually increase in terms of the account opening and trading volume.  The well-known foreign corporate investors and institutional clients are in rapid growth.  Many fund accounts, collective financial plan and futures company asset management business plan to enter the commodity futures market.

Data source: Shanghai Futures Exchange

The open interest structure of SHFE copper futures investors

LOGO

 2006 - 2011 copper corporation’s open interest accounted for an average of about 50% non-ferrous metals futures legal person’s open interest statistics in recent years Copper

铜

Aluminum

铝

Zinc

锌

80.00%

60.00%

40.00%

20.00%

0.00% 2006

2007

2008

Data source: Shanghai Futures Exchange

2009

2010

2011

Corporate customers with well-known foreign background continue to increase

LOGO

The numbers of SHFE copper futures foreign legal persons 350

325

300

294

250 200 150 100

100

50 0

8

8

2005

2006

25

19 2007

2008

Foreign companies have set up commercial companies or trading houses in China to acquire domestic legal person status to participate in the Shanghai copper futures market.

48 2009

2010

2011

2012

Investment bank background Trading background

The accounting ratio of the SHFE refined copper output of its registered brands is the highest.

LOGO

In terms of metal brand registration, Shanghai Futures Exchange gives full play to use the market-oriented means to implement the state’s industrial policies, and actively guides the industry development. At present, most of the scale non-ferrous metals enterprises have become the registered brands in the Shanghai Futures Exchange.

2012

Copper

Aluminum

Zinc

Lead

Domestic registered output (10kt)

481

931

280

167

Brand No.

25

37

18

15

Ratio

83%

46%

58%

36%

Data source: Shanghai Futures Exchange

The full process registration of the overseas brands

LOGO

 On the occasion of zinc futures listing in March 2007, the Shanghai Futures Exchange revised and promulgated the “Non-ferrous Metal Delivery Product Registration Rules of the Shanghai Futures Exchange”, under which the foreign brands registration shall be implemented in full process.  Since January 2009 when U.S. Freeport - McMoRan Copper & Gold Inc. registered the first overseas copper delivery brand in the Shanghai Futures Exchange, CODELCO, BHP, Rio Tinto, Anglo American group have applied one after another. At present, there are 29 registered overseas copper brands, 3 aluminum brands, and one zinc brand. There are a number of overseas copper, aluminum and zinc brands in the pipeline. The output of the registered overseas copper brands accounts for about 50% of the output of foreign copper.

SHFE designated warehouse and inventory

LOGO

 The designated warehouse of Shanghai Futures Exchange is featured of high efficiency, low cost, strictly controlling the risk, always putting the designated warehouse management system and logistics risk control in a very important position.  The copper designated warehouses are set up in Zhejiang, Jiangsu, and Guangdong, further optimizing the designated warehouse network.

Aluminum in Shanghai 沪铝

Copper and zinc in Shanghai

沪铜沪锌沪铅 60.00

60.00

50.00

50.00

40.00

40.00

30.00

30.00

20.00

20.00

10.00

10.00 0.00

09-1-9 09-2-13 09-3-13 09-4-10 09-5-8 09-6-5 09-7-3 09-7-31 09-8-28 09-9-25 09-10-23 09-11-20 09-12-18 10-1-15 10-2-12 10-3-19 10-4-16 10-5-14 10-6-11 10-7-9 10-8-6 10-9-3 10-9-30 10-10-29 10-11-26 10-12-24 11-1-21 11-2-25 11-3-25 11-4-22 11-5-20 11-6-17 11-7-15 11-8-12 11-9-9 11-10-14 11-11-11 11-12-9 12-1-6 12-2-10 12-3-9 12-4-6 12-5-4 12-6-1 12-6-29 12-7-27 12-8-24 12-9-21 12-10-26 12-11-23 12-12-21 13-1-18 13-2-15 13-3-15 13-4-12 13-5-10 13-6-7 13-7-5

0.00

Copper in沪铜 Shanghai

Data source: Shanghai Futures Exchange

Zinc

Aluminum

in 沪锌

in 沪铝

Shanghai

Shanghai

Lead in 沪铅

Shanghai

SHFE copper is one of the best products in exerting Futures’ market functions

LOGO

 The exertion of the functions of the futures markets has been integrated into the production management system of the enterprise. Exerting the functions of futures market

Derivative function of the production links

Formulating the production operation plan

Production cost control

Price discovery function

Product quality management

Hedging functions

Inventory management

Corporate governance structural improvement

Derivative function of the management links

Performance appraisal

M&A value assessment

Financial management capital optimization

LOGO

Part IV Innovation and transformation of China’s Copper Futures Market

SHFE long term development strategy To become a regulated, efficient, transparent and product-inclusive internationalized futures exchange

Product

Market Transformatio Transformation n

Structure Transformation

LOGO

Deepening the non-ferrous metals futures product innovation

LOGO

 1. Non-ferrous metals index futures and commodity ETF  2. Copper futures options  3. Spread, swap, price contracts and other new trading tools  4. Nickel, Tin

Actively carry out the preparatory works for the continuous transaction of nonferrous metals

LOGO

 Since July 5, 2013 when gold and silver are listed for continuous trading, they have been well received. The market runs smoothly, and transactions are active, with the prices at home and abroad closely linked.  Silver futures trading volume exceeded the COMEX, ranking first in the world, and won the "2012 - 2013 year best Asia futures contract“ issued by the FOW magazine.  Actively carry out the preparatory work for the launch of continuous trading of the nonferrous metal products.

Promote the internationalization of the nonferrous metal futures market

LOGO

 The China Securities Regulatory Commission has issued the “Several policy measures for the capital market to support and promote the China (Shanghai) Pilot Free Trade Zone" , approving that the SHFE can set up the Shanghai International Energy Trading Exchange in the free trade zone.  Taking the crude oil bonded delivery mode as a reference, actively facilitating the opening-up of nonferrous metal products to the world market, and promoting the internationalization of non-ferrous metal futures market.

To improve the rules of system design, serve the industry development

LOGO

 1. The exchange has revised the “Clearing Regulations", and will unilaterally collects the margin for bidirectional position holdings of the same product by a client at the same member, or for bidirectional position holdings of the same product by a proprietary member.  2. The exchange has issued the “Arbitrage Regulations" to guide and standardize the market arbitrage.

Actively cultivate the institutional investors

LOGO

 Structure of institutional investors in the developed countries’ futures markets includes: banks, hedge funds, futures companies, securities companies, trust companies and etc.  Vigorously develop the institutional investors, optimize the structure of investors. Research to introduce the banking, securities, trust, QFII and other special corporate accounts.

Risk management is an eternal theme of the futures market!

Shanghai Futures Exchange

LOGO