A year after the nickel pricing debacle, the London Metal Exchange (LME) is exploring Hong Kong as a potential site for expanding its warehouse network. This move, as revealed in a presentation to the LME’s warehousing committee last December, comes amidst ongoing challenges and evolving dynamics in the global metals market.
Around ten domestic and regional LME market participants have shown interest in Hong Kong as a storage location for industrial metals, offering an alternative to mainland China. This development, according to the LME, could significantly enhance cooperation between Mainland China and Hong Kong, addressing some gaps in the LME’s delivery network, particularly those affecting Chinese customers.
However, the proposal to list Hong Kong as a Good Delivery Location (GDL) faces several hurdles. Concerns have been raised about China’s increasing influence over foreign firms and individuals in Hong Kong. The handling of high-profile cases, such as the potential liquidation of China Evergrande Group, could either reinforce or alleviate these concerns.
Adding to the complexity is Hong Kong’s storage costs, which are significantly higher than other regional ports, and its relatively insignificant imports of industrial metals like copper and aluminum. This situation has led some sources to question the viability of Hong Kong as a gateway into China for the LME.
Another challenge lies in the local resistance and regulatory hurdles within China, alongside competition from the Shanghai Futures Exchange (ShFE). The LME’s attempts to expand its warehouse network into China have been consistently thwarted by these factors. In contrast, ShFE is exploring expansion of its metals warehousing network outside China, while the LME plans to launch new metals contracts using prices from the Shanghai Exchange.
Given these complexities, the LME acknowledges that Hong Kong’s role as a base metals storage center is not traditional and does not currently attract significant metal inflows. Current good delivery locations in Asia, such as ports in Taiwan, South Korea, and Malaysia, offer more cost-effective storage solutions.
The cost factor is a significant concern, with warehouse rents in Hong Kong potentially four times higher than the maximum charges in the LME’s system. The LME notes that any move to make Hong Kong a viable option would require subsidies from the Hong Kong government.
In response to these developments, the Hong Kong government referred inquiries to HKEx, which stated that this matter pertains to the LME.
This potential expansion into Hong Kong by the LME reflects the ongoing evolution of the global metals market, marked by geopolitical tensions and the need for strategic positioning in Asia. As the LME navigates these challenges, its decision on Hong Kong’s inclusion in its warehouse network will be closely watched by market participants worldwide.