HKEx eyes China with new metal contracts

Exchange continues its push into commodities with launch of trading platform for metal and energy contracts targeting deals across the border

PUBLISHED : Tuesday, 22 April, 2014, 12:46am
UPDATED : Tuesday, 22 April, 2014, 2:03am

Hong Kong Exchanges and Clearing said it will launch several metal and energy contracts aimed at top commodity consumer China, which will begin trading in the city later this year.

The announcement today comes ahead of the London Metal Exchange week industry gathering which starts on Thursday in Hong Kong.

The LME, the biggest physical metals exchange in the world, is a wholly owned unit of HKEx.

Two sources familiar with the exchange told the South China Morning Post that the new metal contracts to be launched involve copper, aluminium and nickel. A coking coal contract was added given that China is the world's top consumer. The mainland is likewise the leading consumer of the red metal used widely in construction and power grids.

HKEx chief executive Charles Li Xiaojia said in January that the bourse would introduce the Hong Kong trading platform for commodity contracts in the second half of 2014. All 180 local futures brokers can trade on the platform without applying for LME membership.

The Hong Kong contracts have different specifications from the ones traded in London. They would be settled in cash without physical delivery, unlike the LME which maintains an elaborate network of metal warehouses around the world.

This marks the latest attempt by HKEx to promote commodity trading after paying £1.39 billion (HK$18 billion) in December 2012 to buy the LME.

The exchange will host LME week on Thursday and Friday, the second time the annual event will be held in Hong Kong. It is the top industry gathering for hundreds of metal traders, mining companies, metal producers, investors and exchange officials where they can swap information on the latest market developments.

The theme for LME week this year focuses on developments in Asian metals trading, the development of yuan commodity products and internationalisation of mainland commodity exchanges.

LME week is taking place amid lingering controversy over its plans to cut logjams in its warehouses, a move contested by Russian aluminium giant Rusal.

HKEx chairman Chow Chung-kong said the exchange would also look for opportunities to tie up with the mainland futures exchange for a potential commodity "through train" for mainland and Hong Kong investors to cross trade each others' products.

Brokers believe the commodity through train would take time. The expectation for commodity cross-border trading came after mainland and Hong Kong regulators announced earlier this month a stock "through train" scheme to start from October linking the city and Shanghai bourses.

"The HKEx new commodity products launch as well as the potential commodity through train scheme would be a good development for the exchange and local brokers," said Christopher Cheung Wah-fung, legislator for financial services sector. "The futures brokers in Hong Kong would be interested to introduce the commodity products to investors as this would be a new income source for brokers and the bourse and cut down our reliance on stock trading."

But Cheung said it would be an uphill battle for the bourse to develop commodities trading since many local investors have little knowledge about the metal and energy industries.

The LME platform in Hong Kong will directly compete with the Shanghai Futures Exchange, which now trades contracts in copper, aluminium, rebar, zinc and in precious metals such as gold and silver.

The LME platform in the city will compete with the commodity exchange in Dalian, which also has a coking coal contract and is located in the northeast where coal is heavily consumed by cities such as Beijing. The exchange in Zhengzhou is not a competitor because its contracts are mostly agricultural commodities such as wheat and sugar.