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Tom Holland

It's now more than  2 1/2 years since our visionary Chief Executive Donald Tsang Yam-kuen decreed in his 2006 policy address that Hong Kong has a great future as a centre for trading commodity derivatives.
In response, oil company executive Barry Cheung Chun-yuen, who also happens to be the chairman of the Urban Renewal Authority, announced the establishment of the Hong Kong Mercantile Exchange, or HKMEx for short.
The original plan called for the electronic marketplace to go live trading a fuel oil futures contract in March this year.
Two months after the targeted launch date, the new exchange market remains firmly stuck on the drawing board.
Of course, starting a new futures exchange from scratch isn't simple. Clearing mechanisms are notoriously tricky to get right. And members have to be recruited, which means persuading brokers to invest in new staff and technology; no easy task right now when the financial sector is busy cutting back personnel and expenses across the board.
But those are not the only problems the HKMEx faces. The initial plan called for the exchange to kick off with a fuel oil future. The idea was that it would offer mainland delivery points to tap into demand from Chinese users, while denominating the contract in US dollars in order to attract liquidity from international investors.
The plan looked good on paper, but the world has changed since it was first drawn up. At the time, China was suffering a severe energy shortage, and imported fuel oil was in high demand as a raw material for small, privately owned 'teapot' refineries.
Since then, however, the economy has slowed and supply bottlenecks have disappeared. Now the government is pushing to eliminate excess capacity and close down the teapot refiners by imposing punitive taxes on imported fuel oil. As a result, fuel oil imports, which were already on a declining trend (see the first chart below) are expected to fall steeply this year.
Meanwhile, international investor interest in commodities has slumped since last summer as investors have been forced to deleverage and prices have crashed. Fuel oil prices are now down 59 per cent from July's high.
Clearly, if the HKMEx is to realise Mr Tsang's dream of turning Hong Kong into a thriving market for commodity futures, it is going to need another product.
Breaking into the commodity markets is not easy, however. 
With no underlying business in physical commodities, Hong Kong has little natural demand, so dealers will tend to head straight for the established pools of liquidity: Chicago for agricultural products, New York for crude oil and London for base metals.
If there is one commodity in which Hong Kong may just have an edge, it will be gold.
Although the mainland has overtaken even South Africa as a gold producer in recent years, China's newfound wealth means demand has far outstripped domestic supply. Last year,  the mainland's mines produced an estimated 282 tonnes of gold. About 25 per cent  of that disappeared into the central bank's vaults, leaving about 212 tonnes to supply the domestic market.
At the same time, demand from  the country's jewellers reached 327 tonnes, while demand from investors hit 69 tonnes, up 169 per cent from the previous year, according to the World Gold Council. That implies the mainland had to import 184 tonnes of gold last year, more than was used by all the jewellers in the United States.
What's more, that demand is only likely to grow, especially with fears about quantitative easing shaking investor faith in the world's major reserve currencies.
In theory, if Hong Kong could launch a US-dollar-denominated gold futures contract accessible to mainland users, it would also attract international demand, generating a self-sustaining pool of liquidity and possibly even drawing volume away from established markets elsewhere.
That, at least, is the theory. But launching a successful market will not be easy. Any proposed contract will face fierce opposition from the Shanghai Futures Exchange, which launched its own contract in January last year.
And even if trading did go live, it does not follow that hedgers and investors  would automatically flock to the contract. As the second chart below shows, Shanghai gold futures generated huge enthusiasm at their launch. But apart from a brief volume spike on safe-haven flows during the worst of the financial crisis in October last year, they have since struggled to attract the same level of interest.
If that experience is anything to go by, Mr Tsang's vision may not be realised for a long time to come.
Clearly, if HKMEx is to realise Mr Tsang's dream of turning Hong Kong into a thriving market for commodity futures, it is going to need another product



HK's future is golden, or maybe it isn't