An LME dragon dance with David Beckham
The great and the good flocked to Hong Kong this week for the first LME Week Asia since the metals bourse was acquired by Hong Kong Exchanges & Clearing.
The occasion was marked unconventionally, with HKEx chief executive Charles Li dressing up as football legend David Beckham before partaking in a traditional Chinese dragon dance with outgoing London Metal Exchange chief Martin Abbott. Who knew metals could be so fun?
But beyond the glitz and glamour there was also some discussion about the future of the partnership between the two bourses.
With the costumes now firmly stowed and discussions beginning on how Hong Kong can raise its game even higher next year (Alex Ferguson maybe?), Financial News takes stock of where plans are at in the post-HKEx LME era.
Renminbi Clearing
The week kicked off on Monday with the signing of a memorandum agreement between HKEx, the LME and Bank of China to work together to start clearing renminbi commodity products.
The cooperation will see the three parties “examine the feasibility of LME contracts to be cleared in RMB and potential development of RMB-denominated commodity products in the HKEx Group platforms," said Li.
The RMB contracts are aimed at increasing the Asia commodity investor base and driving more trading volume to the LME.
Cross-listing commodities
Thursday brought another memorandum agreement, this time between HKEx, the LME and the China Beijing International Mining Exchange for “collaboration in the exploration of new products and trade services suitable for the Mainland [China], Hong Kong and overseas markets”, said HKEx co-head of global markets Romnesh Lamba.
HKEx has frequently expressed its ambitions to use the LME as a jumping-off point to develop other commodity products for HKEx, with plans to use co-listings with mainland China exchanges to open up access to the Chinese market.
One commodities head of an investment bank said: “Hong Kong is not a natural hub for commodities because it is not a main producer or consumer. It is trying to use China to leverage its position and attract liquidity.”
LME’s new chief executive
Since LME chief executive Abbott resigned earlier this month, speculation has been rife over who his successor might be.
Press reports have pointed to the possibility of LME deputy chief executive Diarmuid O’Hegarty or CME Group managing director of metals products Harriet Hunnable.
One market expert said: “The LME needs to bring in someone who is experienced in electronic exchanges. I don’t think people want someone who is part of the old LME world. It is unlikely they would replace Abbott with someone else of that ilk.”
A commodities figure at one of the large investment banks said that the more interesting question is around what the new chief executives role will be. Abbott is also HKEx's co-head of global markets.
The person said: “Undoubtedly what will be the more interesting dialogue is what is actually the role for that person. Is that person going to have a say in the new products launched in Asia?”
LME Clear
LCH.Clearnet tripled fees to clear LME contracts this month, as it enters its final year as the clearing arm for the metals bourse before LME launches its own clearing house, LME Clear.
The move, market participants argue, has paved an easier path for LME Clear, which will be able to take on the fees set by LCH.Clearnet rather than potentially having to initiate its own increases to clear the contracts. The new fees under LME Clear are not yet known.
The new clearing platform is due to go live on September 22, 2014.
One LME trader said that they were “unhappy” about the fee hikes, however they were glad that other discussions on contract fee changes had been put on hold until January 2015, according to Li.
Warehouses
The LME approved Kaohsiung, Taiwan as a delivery point last week marking the LME’s ninth location in Asia. HKEx wants to take this further now with warehouses in mainland China.
There have been a number of problems with LME warehouses surrounding the up to a year that customers have to wait to get their goods out of the warehouses. Some of this has been put down to warehouse owners looking to maximise storage fees, while other dynamics at play include an oversupply in some metals meaning more going into the warehouses has slowed down the process of getting goods out.
Andrew Patterson, head of metal trading for Europe, the Middle East and Africa at brokerage Newedge, said: “Warehouses in mainland China were a hot topic. At the moment, it can take up to 12 months to deliver physical commodities out of LME warehouses due to queues. We have been hearing from clients that this process should first be improved before setting up additional warehouses. Charles Li said the warehouse issue is one of the key topics on their agenda.”
