The ignominious end to Hong Kong's home-grown commodities exchange leaves the way open for the London Metal Exchange to be the commodities' trading centre linking the city to world commodity markets, analysts say.
The Hong Kong Mercantile Exchange was shut down last week after it surrendered its licence to operate following its failure to generate sufficient business.
Analysts said the LME, taken over by Hong Kong Exchanges and Clearing in a £1.39 billion (HK$16.3 billion) deal in December, would stand a better chance of success in attracting commodities trading to the city, even as they warned of an uphill battle ahead.
"The closure of HKMEx showed the difficulty of setting up a new exchange to trade commodities," said Joseph Tong Tang, executive director of Sun Hung Kai Financial.
"It also shows that HKEx was right to buy a well-established exchange to make its step into commodities trading."
But even if the LME offered investors the ability to trade its products in Hong Kong, it would be a challenge to attract business, as most investors were already accustomed to trading commodities in London or New York, Tong said.
The LME, established 136 years ago, is the world's largest metal exchange, with contracts worth US$14.5 trillion traded last year. Brokers said HKEx paid too much for the LME. Hong Kong government officials, who wish to see more commodities trading in the city, supported the move.
In 2008, the Financial Secretary John Tsang Chun-wah, explained in an article in the South China Morning Post why he thought commodities trading would be an important addition to the city's financial market.
"Commodities markets offer good potential for Hong Kong," he wrote.
"Although the mainland has three commodity futures exchanges, they are not open to participation from foreign investors. This represents a huge opportunity for Hong Kong to develop a commodities futures market that can cater to the mainland."
The HKMEx had aimed to trade oil contracts but ended up trading gold and silver contracts.
Christopher Cheung Wah-fung, the legislator for brokers in Hong Kong, said the LME's products were more attractive and diversified than those offered by the HKMEx.
"The key issue is whether the 400-plus Hong Kong-based brokers can become involved in LME trading. If the HKEx allows only LME members in London to execute LME product trades in Hong Kong, it would not benefit local players," Cheung said.
If the LME allowed Hong Kong-based brokers to trade its products for the city's investors, however, it would be a "win-win" situation, he said.
"This is how we could promote commodities trading in Hong Kong," Cheung said.
The chief executive of the HKEx, Charles Li Xiaojia, said on Tuesday that his bourse's diversification plan would not be affected by the closure of the HKMEx.
"The acquisition of the LME is a long-term plan for the HKEx to diversify its business into commodities trading, in addition to our cash and derivatives markets," Li said.
"It turns HKEx into a multi-asset trading exchange and cuts down our reliance on stock market turnover."Topics: Hong Kong Mercantile Exchange HKEx