COMMENT: LME’s giant step towards Asia is just the start

The London Metal Exchange’s board took a giant step towards Asia earlier this month, and perhaps the biggest move in its history, when it approved the £1.39-billion ($2.2 billion) bid from the Hong Kong Exchange (HKEx).

The London Metal Exchange’s board took a giant step towards Asia earlier this month, and perhaps the biggest move in its history, when it approved the £1.39-billion ($2.2 billion) bid from the Hong Kong Exchange (HKEx).

Once the courts in the UK approve the deal it will be put to shareholders at an EGM next month, with approval needed from 75% of the shareholders and 50% of the members for the takeover to be ratified.

On the financial side, HKEx’s bid was more than satisfactory — the number initially mooted last year was around £700 million, remember — but its success was the result of three other key factors.

It promised to be able to de-risk the LME’s own move into clearing; to back the LME’s date structure and ring; to expedite the process of establishing warehouses in China; and to provide access to the merchants, corporate users and investors of China.

And the LME’s members are already more than familiar with the story of Asia in general and China in particular.

This is Asia’s time: prices established in Asian trading hours now have a far more significant effect on LME markets than they did a few years ago.

“Prices from China and Hong Kong are the futures market’s futures market,” as one executive at a ring-dealing firm observed to Metal Bulletin.

HKEx’s bid told a stronger story of the potential growth in volumes and preservation of business models than ICE could.

Its pitch had a resonance that the Atlanta-based InterContinental Exchange could not match, for all its attributes as a user-focused commodities market with experience of warehousing and clearing.

The pitch, and the cash, are expected to resonate with shareholders as they did with the board, who unanimously backed the bid.

If so, it will be over to HKEx to deliver on the promises it made to the LME shareholders, whose use of the market they will need to continue to promote.

Its head of market development told Metal Bulletin that it hopes to address the issue of warehouses in China over the next 12-18 months — by which members hope he means having them established, rather than simply opening discussions.

Sucden Financial’s head of Asia business development, Jeremy Goldwyn, emphasised in an interview with Metal Bulletin that he believes the establishment of London Metal Exchange warehouses in China will take time, though HKEx’s connections with the politicial establishment in China will help.

Other commentators, including Metal Bulletin’s Lord Copper, have pointed out that China still controls its currency — albeit to a lesser degree than previously — and seeks to keep a tight hold of raw materials.

Those restraints do not necessarily accord with the conditions of free currency and free trade that the Hong Kong Exchange needs to make its prize acquisition pay off.

The LME’s huge stride is just the start of a long journey.

Alex Harrison
Twitter: @alexharrison_mb

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