Shanghai Exchange Halts Duty-Free Metal Delivery Against Futures

(Bloomberg) -- The Shanghai Futures Exchange has suspended the settlement of copper and aluminum futures with deliveries from duty-free warehouses, a mechanism that has long helped Chinese traders avoid paying taxes on metal that can be sold overseas. 

Introduced in 2010, the bonded stockpiles give Shanghai traders the flexibility to sell their metal to international markets when overseas prices are attractive, and send it through Chinese customs and pay value-added taxes only when importing is worth the costs.

The exchange on Thursday announced it would halt the bonded delivery business for copper and aluminum futures, effective immediately. The SHFE informed market participants that the decision was due to dwindling interest in the businesses, two people familiar with the matter said, asking not to be named discussing non-public information. 

The exchange didn’t immediately respond to a request for comment outside of regular business hours.

Activity with bonded deliveries picked up in 2018 when an export window opened up, but otherwise, those warrants are typically costlier and less liquid.  

A key gauge of Chinese import demand is now trading near a record high. The Yangshan premium, which measures what Chinese importers pay above London Metal Exchange prices, surpassed $200 a ton on Wednesday.

Some analyst see SHFE’s move as a precautionary measure to avoid a further supply squeeze, as Chinese copper inventories are below typical levels for this time of year. 

The suspension of bonded delivery could help slow outflows of metal from China when arbitrage between Shanghai and overseas prices motivate such a trade, Jia Zheng, a trading manager at Suzhou Chuangyuan Harmony-Win Capital Management Co., said in an interview.

The impact should be limited, with little bonded deliveries for SHFE copper contracts, and more for aluminum, Zheng said. 

--With assistance from Winnie Zhu.

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