Hong Kong’s LME metal contracts languish in thin business
The three LME metal contracts it launched to great fanfare in Hong Kong have a combined daily average of 287 contracts in the first four months of 2015, making them the second least traded futures contracts at HKEx
When the annual London Metal Exchange (LME) dinner is held on Tuesday next week, that will be the most active day in metal trading in this part of the world.
Hong Kong Exchanges and Clearing (HKEx) exchange spent 1.39 billion pounds in December 2012 to buy the LME to expand commodities trading and cut its reliance on stock market turnover and new listings.
However, the three LME metal contracts it launched to great fanfare in Hong Kong have a combined daily average of 287 contracts in the first four months of 2015, making them the second least traded futures contracts at HKEx.
Those contracts in aluminium, zinc and copper were launched in December as the first step by HKEx to establish an Asian metal trading platform.
Daily average volume in copper and aluminium alone in London are close to 15,000 lots.
The LME contracts in Hong Kong are beating out interest rate futures, which trade an average of one contract a day. The gold contact, the only other commodities contract at the HKEx, was scrapped in March having posted no turnover since last year.
From the aspect of diversifying its income source, that goal has been achieved. HKEx now has about 20 per cent of its earnings coming from the LME. An increase in LME trading fees from January and the start of LME Clear operations last September should boost the income of HKEx when it reports its first quarter results on Wednesday.
However, from the perspective of bringing in more commodities trading in Hong Kong, little if any progress has been made.
The majority of futures brokers still focus on financial index futures where the average daily turnover stands at 260,282, easily dwarfing by several hundred per cent the volume on its LME contracts here.
With the stock market turnover hitting record highs last month when shares touched a 7-year top, investors and brokers are focusing on their stock picks and few really pay attention or care about metal trading.
The investors who trade the metal contracts in London do not have any reason to change their habits or shift their focus in trading to the LME metal contracts in Hong Kong.
Beijing may be a game changer though. If Beijing would allow mainland metal traders and manufacturers to use HKEx to hedge their metal exposure, then it would bolster the turnover and bring in a large amount of liquidity to the Hong Kong commodities market.
If Beijing would give a clear signal on allowing a potential commodities through train between the HKEx and the mainland commodities bourses, it would likely increase the liquidity in the Hong Kong metal contracts. So far though, Beijing has been nearly mum about its plans.
If that is the case, we are going to see the Hong Kong metal contracts continue to struggle in thin turnover.