New metal contracts by Hong Kong Exchanges and Clearing to see low turnover

Tin, lead and nickel contracts launched at a time when commodities and metals looking weak and in a down-cycle

PUBLISHED : Sunday, 13 December, 2015, 12:00pm
UPDATED : Sunday, 13 December, 2015, 12:00pm

Brokers expect the three new metal contracts which start trading on Monday in the Hong Kong bourse would have a lacklustre debut after the worst commodity collapse in a generation which have led to near record low prices in the metals complex.

“Hong Kong investors are not familiar with commodity products. In addition, the metal prices are in a falling trend this year. I do not think the timing is right to introduce these new metal contracts. The turnover of the new metal contracts would not be high,” said Ben Kwong Man-bun, an executive director and head of research in KGI Asia.

A lack of physical delivery for the new contracts would also weigh on the new contracts.

Tin had been trading at US$6.58 per pound on Thursday, which is perilously close to its seven year low of US$6.30.

Nickel also hit a seven year low recently by trading at US$3.89 on Thursday, not far from the US$3.7 per pound low.

Lead is faring not much better, trading on Thursday at 76 US cents per lb and not far from its 2010 low at 71 US cents.

The exchange launched its first three yuan-denominated metal contracts in aluminium, zinc and copper last December 2014.

All the contracts are miniature contracts based on the specification of the metal contracts trading at the London Metal Exchange which is a wholly owned subsidiary of the HKEx.

Gary Cheung Wai-kwok, the chief executive of Tung Shing Futures (Brokers), said there were only few customers trading the aluminium, zinc and copper contracts over the past year.

HKEx data showed the three contracts on average only traded a combined 225 contracts a day in the first 11 months this year. Daily average volume in copper and aluminium alone in London are close to 15,000 lots.

“I do not think the HKEx new metal contracts in tin, lead and nickel would turn around the table. The turnover would not be much higher than those contracts in aluminium, zinc and copper,” Cheung said.

He added that while the six metal contracts are produced with similar specifications as those traded in the LME, the Hong Kong contracts are not exchangeable and is different from LME contracts.

“This has made it difficult for traders to do arbitrage between the two markets,” Cheung said.

All six metal contracts trading in Hong Kong are traded in yuan, while LME contracts are traded in US dollars per tonne. The Hong Kong traded contracts could only be settled by cash with no physical delivery while the LME contracts can be settled in cash or physical stock.

“Many people who trade the metal contracts are end users who want to get the metal for delivery when their contracts end. They can only trade the LME contracts to get the physical delivery and that is why they do not like to trade these contracts in Hong Kong,’” Cheung said.

Clara Chan, vice-chairman and chief executive of Lee Kee Group and a member of the LME, said many manufacturers need tin, lead and nickel for their electronic and other products and physical delivery is vital.

“There is demand from the end users for these metal contracts. Many of them are now trading these contacts in London but I think it is also possible for them to consider trading the contracts in Hong Kong. It would need time and education for them to trade in the Hong Kong commodities market,” Chan said.

“If Hong Kong metal contracts trading have physical delivery, it would help as many of the traders are end-users,” she said.

HKEx has spent 1.39 billion pounds (HK$16.63 billion) in December 2012 to buy the LME to expand commodities trading and cut its reliance on equities market turnover and new listings.

Christopher Cheung Wah-fung, lawmaker for the financial services sector who is also a broker, said the local brokers do not have lofty hopes on turnover in the new metal contracts.

‘The exchange has to diversify its product range. The metal contracts may not be successful from day one but they may be able to gradually improve in the medium and long term. If Beijing would allow more mainland metal users to trade the products, it may also help the turnover of Hong Kong commodities trading,” he said.