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HKEX - closing the warehouse circle?

Martin Hayes

This article was written by Martin Hayes. All views and opinions expressed are strictly his own.


The London Metal Exchange (LME) earlier this month approved Hong Kong as a location for registered warehouses physically to store its main non-ferrous metals, just over a decade since the world’s largest raw materials exchange was acquired by HKEX.

It hasn’t been for want of trying – for years the LME’s ambitions have been stymied, to some extent, by Chinese regulators.

When up and running, Hong Kong warehouses will store aluminium, copper, lead, zinc, nickel, tin and aluminium alloy – historically the LME’s primary physical delivery contracts, which will then be within a stone’s throw of mainland China.

Don’t forget, the country is the world’s second biggest economy, with annual GDP growth around five percent, and it is the largest metals end-user

Given that HKEX (Hong Kong Exchanges and Clearing) bought the LME for a substantial 1.388 billion pounds in June 2012, this addition of potential storage facilities on the Chinese mainland has been a long time coming, unlike the other initiatives it undertook in the immediate aftermath of its purchase.

After all, within six months of buying the LME, Taiwan’s Kaohsiung was authorised as a delivery point. Also, in early 2014, HKEX introduced copper, aluminium and zinc mini-contracts, mirroring LME versions. Lead, tin and nickel followed in subsequent years.

And there was the famed ‘bazooka’ of reforms that were rolled out for the LME’s warehousing system – QBRC and the like.

However, that was then – in 2025 the global political and financial backdrop has changed radically. China right now is seen in a much different light, politically and economically. In the early years of the 21st century, relations between China and the major mature Western countries were warmer, more co-operative, and, from a trade viewpoint, freer.   

But now, China’s external political ambitions and alliances are viewed with some suspicion in many quarters, while the US has a new president in Donald Trump, who is presently spraying Executive Orders around like confetti, some of which are likely to be in the form of stiff tariffs against Chinese products and exports.

This is not going to be particularly helpful in a global economy which is still getting over the COVID pandemic, against the background of war in Ukraine, the subsequent energy price rises and conflicts in the Middle East.

For financial exchanges any downturn in economic activity may result in price weakness, reduced business and lower volumes – not helpful for an LME facing more direct competition from rival financial exchanges in the commodity marketplace – notably the US’s CME and China’s SHFE (Shanghai Futures Exchange).

Going forward, the LME perhaps faces unique challenges in its long-awaited listing of Hong Kong. Where warehousing is concerned it is not a typical LME location – the territory cannot be described as an area of net consumption – a long-standing prerequisite for listing stores. However, mainland China is such an area and its end-use will undoubtedly continue to grow.

Additionally, competition from ports in the Shanghai region will be keen – costs in Hong Kong are going to be higher – so it is possible that governmental financial incentives or other support will be needed.

Nevertheless, although it has taken over a decade, HKEX’s logical post-purchase measure – a delivery location nearer than Taiwan, South Korea and Malaysia - is now in place.

The timing may not be ideal, compared to ten years ago, and it may be a slow burner, but the LME is now much more pro-active in marketing and pushing its initiatives, so the Hong Kong location stands a good chance of being a success.





  

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