COMMENT: Charles Li offers clues to future metal markets

Charles Li’s blogs are read and interpreted very closely by those that are interested in the future of prices quoted on the international metal market – the London Metal Exchange – which Li bought last year.

Charles Li’s blogs are read and interpreted very closely by those that are interested in the future of prices quoted on the international metal market – the London Metal Exchange – which Li bought last year.

The ceo of Hong Kong Exchanges & Clearing (HKEx) posts the pieces sufficiently regularly on the exchange’s website that it must sometimes be difficult for his own staff to keep up with what has been published.

His post on LME Week Asia merits close attention as the market gathers for the first time in Asia since Li completed his £1.388 billion ($2.15 billion) takeover of the London bourse.

He discusses explicitly the fact that the Hong Kong exchange is seeking a strategic partner for the LME in China, in common with its own strategy to form joint ventures, cross-listings and revenue-sharing deals with the six mainland China exchanges in the other markets in which it is active or seeking to make greater inroads.

HKEx created a joint venture in Hong Kong with the Shanghai Stock Exchange and the Shenzhen Stock Exchange in June 2012.

Dual-product listing possible...
On a granular level, this suggests, for example, that HKEx is exploring the possibility of listing cash-settled yuan-denominated copper prices licensed from the Shanghai Futures Exchange (SHFE) alongside cash-settled dollar-denominated copper prices indexed against LME prices.

The SHFE would, in this hypothetical scenario, be able to list dollar-denominated copper prices licensed from the LME in return.

Such deals would theoretically enable arbitrages to take place both on the mainland and Hong Kong exchanges, and between prices on the latter and on the LME.

Of course, there are significant political and regulatory issues at play here as well, which explains why in the past Li has been careful to caution that it is important not to focus on any single issue, such as the listing of LME warehouses in China, for example.

The latter issue is notable by its absence from his post on LME Week Asia.

... but not the time to push warehouses
If it was once a banner item, a big element in HKEx’s successful bid for the LME, for the moment Li appears to be putting a little bit more distance around it.
In a later post, after the LME listed warehouses in Taiwan for the first time, he simply wrote: “Ideally, the LME would be able to eventually license
warehouses in mainland China itself.”

Given the plans of one possible partner, the SHFE, to list more warehouses, and the continuing rumbling about the material locked away in queues in the LME’s own sheds, Li might well feel that now is not the right moment to push the issue.

Whoever is announced at some point over the next few months as Martin Abbott’s successor will need to be at the very top of their game – and an avid reader of a blog from Hong Kong…

Alex Harrison
Twitter: @alexharrison_mb

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