Shanghai Futures Exchange, China's only exchange trading metal and energy contracts, has an ambitious plan to introduce new oil-related products to meet the hedging needs of heavy energy users, including power companies and airlines, at a time of wide oil price swings in international markets.

The exchange is also contemplating a series of measures to open the futures market to more financial institutions and foreign investors.

China's increased consumption of oil and other raw materials, particularly copper, to fuel its rapid economic growth, is widely considered to have a direct influence on world prices. For that reason, prices of futures contracts traded on the Shanghai Futures Exchange are important enough to set a world trend. More and more foreign traders have shown a strong interest in participating in the exchange market.

Due to growing demand for hedging by oil-related enterprises amid price volatility of oil products, the exchange is developing and will launch in due time contracts for heavy high-sulphur crude, medium low-sulphur crude, gasoline, diesel and liquefied petroleum gas, said Chu Juehai, head of the exchange's oil futures development team, at a forum earlier.

"Our objectives are to create a crude and finished oil futures market that can reflect the supply and demand relationship in China and the Asia-Pacific region," said Chu.

Currently fuel oil is the only energy contract traded on the exchange. The current daily turnover stands at 127,000 contracts, up by more than half on the previous year and almost doubling the amount in 2004 when it was launched.

On the metals side, the application to launch a steel contract has been handed to the China Securities Regulation Commission (CSRC) and the contract will start trading as soon as approval is given, said Lao Guangxiong, vice-president of the exchange.

Copper and aluminium are the two metals currently traded on the exchange. While the trading of aluminium is gaining momentum with 371.45 billion yuan (US$46.43 billion) worth of contracts changing hands in 2005, the trading of copper has remained strong  4.05 trillion yuan (US$506.25 million) worth of contracts in 2005 accounting for 30 per cent of the value of all commodities futures traded  and has become even more so amid high price volatility in recent months.

Driven by both strong demand from developing countries such as China and speculation by funds looking for good returns, the price of copper witnessed an unprecedented increase to reach US$8,500 per ton in the London market, almost doubling the level at the end of last year. As a result, the domestic copper price soared to record highs  hovering around 73,000 yuan (US$9,125)  despite occasional downward corrections.

"I don't think the price deserves to be as high as it is. The price has been driven there by speculators' interest and the market, I think, could calm down quite abruptly," said chairman of NYMEX Europe Limited Roy Leighton on the sidelines of the forum.

Yet before that happens, the copper price could be "distorted" to as high as over US$10,000, said Jeremy Goldwyn, head of industrial commodities of the UK-based Sucden brokerage firm that helps Chinese domestic firms to hedge overseas.

To enhance risk control amid severe price volatility, the exchange raised margins for both the metals by two percentage points at the end of last week.

Also for risk control, which the exchange authorities deem as the pre-condition for opening the market further, a futures investors protection fund is to be set up this year, said Yang Maijun, director-general of the CRSC's futures supervision department.

Like the protection fund available to domestic securities investors, the futures fund is aimed at protecting investors from non-systematic risks, such as the mismanagement of futures companies, and the misappropriation of margin funds and so on.

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