London metal exchange mulls adding warehouse in Hong Kong

The London Metal Exchange is exploring whether to license a warehouse in Hong Kong as it seeks to strengthen services to clients in China — the world’s biggest metals market.

A third-party study on the feasibility of a Hong Kong warehouse has been commissioned, Bonnie Chan, chief executive officer of Hong Kong Exchanges & Clearing Ltd. — which owns the LME — said at the metal exchange’s annual Asia seminar in the city on Thursday. 

“Our mission is to get as close to the mainland as possible,” LME Chief Executive Officer Matthew Chamberlain said in a Bloomberg TV interview earlier Thursday. “Hong Kong is absolutely at the center of our plans for that bridge.”

The LME has long wanted to establish a warehousing foothold inside mainland China, but has been rebuffed by Chinese regulators over concerns including competition with the Shanghai Futures Exchange. And in neighboring Hong Kong, high property and labor costs have been a hurdle. In response to questions about warehouses in the mainland, Chamberlain said that was a decision for Beijing to take.

“The ability to deliver into Hong Kong, to truck or to rail metal down here on the fantastic transport network, is something that we are really excited about,” Chamberlain told the seminar.

The LME has a large network of approved warehouses worldwide that at times hold millions of tons of metals from copper to aluminum and zinc. When Chinese users want to deliver metal to the exchange, their closest options are in South Korea, Taiwan or Malaysia. 

While China is largely a net importer of metals traded on the London bourse, its producers also occasionally export when overseas prices race ahead of the domestic market. Recent months have seen outbound shipments of copper rise to unusually high levels, adding to stockpiles in the nearest locations.

A warehouse in Hong Kong would “strengthen the link between mainland physical metals markets, and international pricing on the LME will create more market arbitrage opportunities,” Chan told the seminar. China’s drive for a greener economy is likely to boost its demand for materials, and the city has the logistics infrastructure and trusted regulatory frameworks to make a warehouse work, she said.

The Hong Kong Energy, Mining and Commodities Association, a local industry body that includes metals traders, said in a statement it has been in talks with the bourses to promote the city as a “good delivery point” to serve clients from the city and mainland China to throughout the Asia-Pacific region. The association is collecting logistics and industry data for LME, it said.