Recent experiences of copper on the Shanghai futures exchange: Some lessons for warehouse monitoring

The Theory of Storage of Working (1949) and Brennan (1958) predicts that demand shocks reduce inventories, raise convenience yields and generate negative forward spreads. The goals of the paper are threefold: i) Analyze the Shanghai Exchange copper forward curves over the period 2008 when the trading volumes of metals Futures contracts grew in a remarkable manner; ii) Exhibit the unprecedented dynamics of the Shanghai Exchange copper forward curve ahead and at the time of the uncovering of the problem of forged warehouse receipts related to a large warehouse located in the Chinese port of Qingdao; iii) Show that the Theory of Storage is validated on this new Exchange over the period of analysis, with weaker results when exchange inventories are augmented by stockpiles of metals stored in 'bonded warehouses' with duties unpaid and no immediate availability for consumption. These findings may contribute to reinforce in the direction of policy makers messages on the importance of the constant scrutiny of the forward curve changes and the role of warehouse monitoring on the other hand.