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Physically settled platinum and palladium futures contracts and futures options will commence trading on November 27 on China's Guangzhou Futures Exchange, which is cracking a world first by taking delivery of sponge, an advance that is highly attractive to industrial and automotive end users. Up to now, exchanges have only been prepared to take delivery of platinum ingot and bar.
Despite being the world's largest consumer of platinum group metals (PGMs), China has typically been a PGMs price taker, with only its varying levels of imports impacting on international price discovery.
Now, the listing of platinum and palladium futures is seen as increasing the influence of China's future demand expectations on global price discovery.
Moreover, the provision of an alternative mechanism to gain exposure to platinum and palladium supports broader liquidity and the overall effect is viewed as being a major boost for South Africa's world-leading PGMs endowment in that fabricators can register their future production under a 120% bank guarantee and price risk hedging across the supply chain will likely lower buyback discounts.
Guangzhou will publish stock holdings daily amid rising hope of a link-up with the Johannesburg Stock Exchange to bring a ready-made green finance derivatives system to South Africa.
"The launch of the Guangzhou Futures Exchange and the fact that it's open to international participation, means that China's future demand expectations can begin to be reflected in the price discovery process, and that's going to be quite beneficial to the market," World Platinum Investment Council research director Edward Sterck pointed out to Mining Weekly in a Zoom interview. (Also watch attached Creamer Media video.)
As with other futures exchanges, exposure will need to be collateralised with physical platinum in exchange approved warehouses as margin against short positions.
This may result in a demand draw as volumes increase. Since the platinum-trading Shanghai Gold Exchange (SGE) offers only one-way trading with purchase for delivery, Guangzhou is positioned to attract two-way domestic volumes.
Platinum volumes have averaged around 0.8 t a week on SGE, well below average spot trading on London Bullion Market Association (LBMA) and on the New York Mercantile Exchange (NYMEX). The latest available data for Osaka Exchange Platinum Standard Futures trading volume as of November 21 was 7 157 contracts.
In the view of Sterck, Guangzhou is going to be of significant benefit on many different levels.
To begin with, it will increase liquidity in China and eventually increase liquidity globally. "If you look at the platinum trading volumes on the Shanghai Gold Exchange, as an example, they average only about 4 t a week, whereas if you look at, say, NYMEX trading volumes, it's more like 200 t a week. So, clearly, the ability to bring into play another derivatives market within China has the potential to massively scale up liquidity there."
The exchange makes platinum more accessible as an investment. It also uplifts platinum an industrial metal to the end users within China and eventually to available to international participants, which creates another avenue by which arbitrage can take place on the regional pricing differentials between London, New York, Japan and China.
Again, that helps to increase liquidity and the availability of platinum to market participants. The other thing to bear in mind is that within China, there has historically not been an easily accessible way to manage price risk for end users.
"For example, jewellery manufacturers or the fabricators of investment products or automakers don't have the ability necessarily, to easily manage their price risk. As a result, particularly when it comes to...

China’s platinum futures exchange debut seen as major boost for South Africa's PGMs

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