LME prepares China strategy
LME prepares China strategy
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Hong Kong Exchanges and Clearing Ltd. (HKEX) and its subsidiary the London Metal Exchange (LME) are beginning to spell out plans to bring their global metals exchange services to China.
At a media workshop held in early June in Hong Kong, HKEX Chief Operating Officer Trevor Spanner and HKEX Co-Head of Market Development Li Gang provided updates on the LME efforts in China—the world’s largest producer and consumer of metals.
Li described the current Chinese futures market as an active, high-volume one, but also one where “the whole market is focused on investment and speculation.” According to Li, less than 1% of the metals trades made on China’s three futures exchanges involve settlement or the delivery of a product.
He said the LME’s model is an inverse pyramid of this, with producers, consumers and brokers accounting for 75% of the volume traded.
While the three Chinese exchanges host speculator traffic, most metals buyers and sellers shop from a set of regional or online platforms that Li compared with “a produce market” where “you can buy the vegetable you want” but in modest amounts and without a risk-taking broker or clearinghouse in the middle of the transaction.
Spanner said the Chinese system (or any off-warrant system) has vulnerabilities, including “incidents where people were repledging metal or pledging metal they didn’t have in a warehouse.” The most widely reported incident involved multiple pledges made against some 400,000 tonness of metal (mostly aluminium) by a trader at the Chinese port of Qingdao.
The LME model that provides for higher volumes, hedged pricing and the risk transferred to another party would be “the most convenient method to obtain their metal” for Chinese buyers and sellers if they had the option, said Li.
Both Li and Spanner acknowledged barriers to any quick transition, with Li listing the barriers as “the free flow of capital” and taxes, most notably China’s value-added tax (VAT). These barriers are why, despite it now being the world’s largest producer and consumer of metals, “China has never fully integrated with the rest of the world” when it comes to metals exchange trading,”he said.
Spanner listed scrap recyclers as one of the five major categories of metals exchange users globally, commenting, “There is a lot of [metals industry] activity globally built around recycling.”
To what extent the VAT difference, regulations and ingrained market habits will allow the LME to expand aggressively in China remains a question, said Li, but he also said the LME is receiving backing from large China-based metals companies and trading houses. In China, “real economy” metals producers and traders are anxious to have an alternative platform, he indicated.
The plans described by Li and Spanner jibe with the language found in the HKEX “Strategic Plan 2016-2018” document, where among the top three priorities on the commodities side is the goal to “develop a spot commodities trading platform in the mainland (China) market in order to service the real economy, with a view to producing and internationalising ‘Chinese benchmarks’ as well as ‘physicalising’ the mainland commodities market using the LME model.”
“This is very difficult, but we are committed to it,” said Li. He also said the exchange that takes shape in China may not be an exact replica of the LME. “In China, a lot of the market is now offering us a big opportunity to establish another ‘quasi-LME.’ Step-by-step, we are going forward slowly.”
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Source: Recycling Today
LME prepares China strategy
<![CDATA[Hong Kong Exchanges and Clearing Ltd. (HKEX) and its subsidiary the London Metal Exchange (LME) are beginning to spell out plans to bring their global metals exchange services to China. At a media workshop held in early June in Hong Kong, HKEX Chief Operating Officer Trevor Spanner and HKEX Co-Head of Market Development Li Gang provided updates on the LME efforts in China—the world’s largest producer and consumer of metals. Li described the current Chinese futures market as an active, high-volume one, but also one where “the whole market is focused on investment and speculation.” According to Li, less than 1% of the metals trades made on China’s three futures exchanges involve settlement or the delivery of a product. He said the LME’s model is an inverse pyramid of this, with producers, consumers and brokers accounting for 75% of the volume traded. While the three Chinese exchanges host speculator traffic, most metals buyers and sellers shop from a set of regional or online platforms that Li compared with “a produce market” where “you can buy the vegetable you want” but in modest amounts and without a risk-taking broker or clearinghouse in the middle of the transaction. Spanner said the Chinese…