The London Metal Exchange (LME) is considering Hong Kong as a location to expand its global metal warehouse network, with the hope of eventually gaining access to its ultimate target, mainland China.
This move aligns with the LME’s long-standing goal of establishing warehouses in China, the world’s largest consumer of industrial metals, following its acquisition by Hong Kong Exchanges and Clearing (HKEx) in 2012.
Reuters reported that the LME has received interest from companies in the region regarding the use of Hong Kong as an alternative storage location for industrial metals. According to a presentation seen by the wire service, around 10 domestic and regional LME market participants have expressed interest in this initiative either directly or through the Hong Kong Energy, Mining, and Commodities Association (HKEMCA).
The LME sees a warehouse in Hong Kong as an opportunity to showcase deeper cooperation between mainland China and the territory. It believes that Hong Kong, as a good delivery location (GDL), would address gaps in its delivery network, which have been a source of frustration for some Chinese customers.
However, there are concerns about potential obstacles to listing Hong Kong as a GDL, including risks associated with China’s growing influence in the territory and the evolving political situation the region has undergone pre- and post-Covid.
The viability of the proposal is also challenged by the cost of storage space in Hong Kong and its relatively insignificant imports of industrial metals traded on the LME. Additionally, Chinese regulations and resistance from local competitor, the Shanghai Futures Exchange (ShFE), have previously hindered the LME’s expansion into China.
Yet, recent pressures on Chinese exchanges to innovate and expand in Asia have led to some changes, with ShFE exploring the expansion of its metals warehousing network outside China while the LME plans to introduce new metals contracts using prices from the Shanghai Exchange.
Finally, to make warehousing in Asia’s world city commercially viable, the LME may require additional support from the Hong Kong government, such as subsidizing warehouse rents or granting “fast-tracked” customs status for LME metal across the mainland border.
