Cross-border delivery a leap for commodity futures

China's futures market completed the first cross-border delivery over the weekend, marking a major breakthrough in setting up overseas delivery warehouses.

The Shanghai International Energy Exchange made a cross-border delivery of 2,500 metric tons of low-sulfur fuel oil futures from Jan 19 to 21, which was the first such delivery in the Chinese futures market.

The futures settlement was made in China, while the delivery was made at the overseas warehouse in Singapore.

Upon delivery, Freepoint Commodities Singapore Pte Ltd, which already has 1,000 tons of the commodity, is scheduled to sell the fuel oil to Pertamina, Indonesia's state-owned oil and natural gas corporation. Pertamina, in turn, will supply the fuel to cargo ships.

Another 1,500 tons purchased by Trafigura Pte Ltd, a Singaporean multinational commodity trading company, will be directly used as bonded fuel for international vessels.

The novel business model in which a futures settlement is completed in China while delivery is made overseas, was initiated by the Shanghai INE's parent institution, the Shanghai Futures Exchange, for the first time in the world.

Recognizing the business model as a "milestone" in the internationalization of the settlement and delivery in the Chinese futures market, Freepoint Commodities Singapore said in a press release that it will also help with the further opening-up of China's futures products and thus grow the country's influence in international commodity pricing.

Freepoint Commodities Singapore will be able to further optimize its logistics costs and inventories via the INE's new business model. It will consider evolving into a settlement center for the INE to more thoroughly take part in low-sulfur fuel oil cross-border settlement and delivery businesses, according to the press release.

The relatively more eco-friendly low-sulfur fuel oil, which is mainly used in shipping, has gained in importance as the International Maritime Organization amended the regulations on air pollution caused by vessels in October 2016.

Singapore, which is the world's largest consumer of shipping fuel oil, has seen the ratio of consumed high-sulfur fuel oil drop from 92 percent in early 2019 to 21 percent in May last year, according to Yongan Futures.

The China Petroleum and Chemical Industry Association estimated that China will account for 30 percent of the world's low-sulfur fuel oil output by 2022, as the tariff rebate policy for the product was implemented at the beginning of last year.

Chen Weiqiang, assistant to the general manager of BOC International Futures Ltd, said that the cross-border delivery has expanded the services of the INE, helping companies to bridge the domestic and overseas markets as well as manage risks on a global scale.

By introducing into the INE premiums and discount pricing determined by market fluctuations for the product, China will be able to elevate its influence in commodity pricing worldwide.

The attempt will also facilitate international trade and better serve global market entities as the usage of the product varies from reselling to fueling based on the first cases, said Chen.

Chinese companies are thus able to explore more distribution channels. The Chinese futures market can help allocate resources more efficiently on a global scale in this sense, he said.

The INE has accelerated its opening-up over the past few years. It launched the first international yuan-denominated crude oil futures product in early 2018, followed by rubber and low-sulfur fuel oil futures. In November, the bonded copper futures contract was made available to foreign traders as the INE's fourth international product.