Queries raised over bid for LME

PUBLISHED : Tuesday, 05 June, 2012, 12:00am
UPDATED : Tuesday, 05 June, 2012, 12:00am


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Hong Kong Exchanges and Clearing wants to buy the London Metal Exchange in order to diversify its business, but analysts question how the acquisition will really help the city develop its own commodities trading.

HKEx chairman Charles Li Xiaojia (pictured) was in London last week to lobby LME shareholders to accept the takeover offer, trying to convince them that the bourse can help it develop its commodities business in mainland China.

The bid marks the first overseas takeover attempt by the local bourse.

US-based Intercontinental Exchange and HKEx are the two remaining bidders for the 135-year-old exchange, the world's largest metal trading platform that handled a record US$15.4 trillion in contracts last year. Both bidders have offered more than GBP1 billion (HK$11.93 billion) and pledged to keep the LME and its trading floor in London.

The LME board has not yet indicated its preference but analysts believe HKEx, with its links to mainland China, has a good chance of being selected. The LME has a worldwide warehouse network for metal delivery but has no operations in China. It still needs to win support from shareholders as well as British regulatory approval, so the deal may drag on for several months.

If the HKEx does buy LME, it will have little impact on its plan to expand trading in commodities in Hong Kong as LME operations will remain in London. And even if the LME can help train and launch commodity products, it may be difficult to attract trading.

'Hong Kong is a financial city and has no end-users for many commodities. We do not have many farmers, we do not have any heavy industry and the oil companies are not based here,' said Joseph Tong Tang, an executive director of Sun Hung Kai Financial. 'A lack of end-users for these commodities such as oil, metal or agricultural products has made it hard for Hong Kong to develop commodities futures products.'

Tong said the mainland, which has heavy industries and extensive agriculture, could support three commodity exchanges.

'Hong Kong can act as a fund-raising centre for many mainland companies with initial public offerings because we are a deep and liquid stock market which is traded by international investors,'' he said.

'In terms of commodities, however, China has more traders and experts than Hong Kong and the mainland commodity exchanges are doing well.'

Commodity investor James Rogers believes the takeover would help HKEx and Hong Kong to develop commodities trading, provided 'they execute properly'.

Rogers said HKEx was strong in initial public offerings and stock trading but lagged behind in commodities trading, partly because it never put enough effort into commodities and partly the mainland had some good commodity exchanges.

The Hong Kong Futures Exchange, which in 2000 merged with the stock exchange to form the HKEx, had contracts in sugar, cotton and soyabeans.

Gold is the only commodity traded on the HKEx, but there have been no trades since November last year, while the average daily turnover last year was only 21 contracts. The most active product on the HKEx is the Hang Seng Index futures, but it is a financial future.

To HKEx, the acquisition of LME is a quick way to develop into commodities trading, which under Li's strategic plan would allow HKEx to diversify its income and rely not only on stock trading and new listings.

Analysts warned of risks and said the HKEx was a cash market with little management experience and expertise in trading commodities.

What is more, the HKEx is a listed firm while LME is privately owned and is not for profit. If it is turned into a profit-making body, it might face opposition from LME members.

A Credit Suisse report said the HKEx would need to raise debt to finance the LME deal. The HKEx has applied for a bank credit line and received shareholders' approval to issue new shares to prepare for the takeover.