Across The BorderWhy Hong Kong exchange’s Qianhai metal plan won’t fly without physical delivery

Hong Kong Exchanges and Clearing’s plan to set up a metal trading platform in Qianhai is considered a breakthrough for the local bourse to expand into commodities trading but brokers and metal manufacturers say such a plan would be successful only if it can arrange physical delivery.

HKEX last week announced it will set up a metal trading platform in Qianhai, the special economic zone off Shenzhen. It, however, did not provide any details or a launch time frame.

Clara Chan, vice-chairman and chief executive of metals major Lee Kee Group and a member of the HKEX subsidiary London Metal Exchange, said many manufacturers would be interested to trade in the Qianhai platform provided it has physical delivery.

“The numerous manufacturers on mainland China who use metals for production are now trading on the LME, which has physical delivery. If the HKEX wants to attract these end-users to trade in Qianhai, it is very important for the HKEX to arrange warehouse and physical delivery,” she said.

HKEX spent £1.39 billion (HK$15 billion) in December 2012 to buy the LME in a bid to expand into commodities trading and cut its reliance on equities.

While the LME is already contributing to the HKEX bottom line, the acquisition has not helped HKEX much in commodities trading. The six metal contracts available in Hong Kong at present have very little turnover. The lead and tin contacts have had no trading this year while the aluminium futures on average only has had six contracts traded daily in March. It was 24 for copper and 27 for nickel. The most popular one, zinc, saw an average daily turnover of just 47.