Experts say HK's importance as trading centre overestimated The government's ambitions to develop Hong Kong into an oil trading hub was met with scepticism yesterday by market observers who said that it overestimated the city's importance as a trading centre. Officials endorsed the creation of the Hong Kong Mercantile Exchange (HKMEx) that they plan to put into operation from the first quarter of next year by selling contracts priced in US dollars for fuel oil delivered to the mainland. 'If commodities were not jumping, especially oil, we would not be screaming for another market to speculate on oil,' said Larry Grace, an energy analyst at Kim Eng Securities. 'It's not a natural, organic growth.' And there is already a major oil trading centre in Singapore, which is well-situated at the gateway to the Asia-Pacific, along established shipping lanes from the Middle East. Singapore has a stranglehold on the region's oil trade and handles about US$300 billion in transactions each year, according to Bloomberg. 'If they are setting it up just to match Singapore, it will fail for sure,' said Adi Imsirovic, a crude oil swap trader with Petraco Oil Company in Singapore. The plan to transform Hong Kong into an oil trading hub is part of the government's larger ambition to position the city as an international finance centre. It has already rolled out plans for an Islamic finance market. In order for Hong Kong to develop into an oil trading hub, the city would have to woo international traders and investors by addressing concerns about air pollution and overcrowded international schools, Mr Imsirovic said. Simply creating an exchange would not be enough to draw them away from Singapore and other trading hubs. 'Dubai has all the oil in the world but is not a hub,' Mr Imsirovic said. Some said that made the Middle East emirate a more likely candidate than Hong Kong to develop into the next international oil hub. 'Wouldn't it be much more natural to try to price oil from the place where oil and more refined products are coming from?' asked Mr Grace. Aside from its proximity to oil-producing areas, the Dubai Mercantile Exchange is the product of a joint venture between the New York Mercantile Exchange and other parties. This ensures abundant supplies of both liquidity and expertise in managing the bourse. By contrast, the HKMEx has only secured letters of intent of participation from a group of strategic partners that include Barclays Capital, Morgan Stanley and Noble Group. Guangdong Oil and Gas Association oil department head Yao Daming said one of the primary issues would be how mainland traders that needed physical delivery of fuel oil could exchange yuan into US dollars to execute trades. An industry source said: 'The HKMEx is more tailored for hedgers and speculators that do not need physical delivery.' Titan Petrochemicals, an oil transporter, was expected to announce plans soon on a separate fuel oil trading centre in the Pearl River Delta targeting mainland traders and end-users, the source added. However, the HKMEx will be able to allow international traders to use Titan's mainland storage facilities even if they would prefer to distribute fuel oil to other regional customers rather than the mainland. 'There are other East Asia-centred locations that could be more naturally suited as an oil trading hub or at least have infrastructure that already exists,' Mr Grace said.
