LME Asia Week 2018: Big market brings big questions

Pictured above: HKEX Chief Executive Charles Li

The Hong Kong-based Hong Kong Exchange (HKEX) organization purchased the London Metal Exchange (LME) in 2012, but in the ensuing six years that transaction has not yet seemed to move the center of gravity for global metals pricing to China.

HKEX Chief Executive Charles Li was among several speakers at the LME Asia Week 2018 Seminar, which took place in Hong Kong in May, to address the topic of how and when the People’s Republic of China—as the world’s largest consumer and/or producer of steel, aluminum and copper—will host a metals pricing exchange used worldwide.

Both the LME and the competing Shanghai Futures Exchange (SHFE) have made strides in boosting China-based metals trading activity using its services, but speakers and panelists at the LME seminar consistently referred to Chinese buyers and sellers as needing to have a wider presence in the global market in terms of price setting.

Li said each of the LME’s “three big aspirations” involved increasing China’s presence in the global metal trading market. Those initiatives involve establishing LME-bonded warehouses in mainland China; increasing China-based LME trading activity and connections; and starting up operations of the proposed Qianhai Mercantile Exchange (QME), which HKEX has proposed as it “brand new commodities platform in Qianhai in Mainland China.”

In the meantime, said Li, “China is the biggest country in terms of [metals] volume, but is always a ‘price acceptor.’” He urged investors and regulators alike to consider the importance of “China having the ability” to influence global pricing.

Caution in making this change can center on three matters, according to Li: 1) debates as to whether pricing in China or in established Western markets is “true” pricing; 2) whether pricing should be based on spot trading or futures activity; and 3) whether, for regulatory and pricing reasons, Hong Kong should be treated as part of China or adhere to its separate Special Administrative Region (“one country, two systems”) status.

Settling the three questions has become similar to making “a slow-cooked broth,” said Li, adding he had few updates to offer on the matter to LME seminar audience members who also attended the 2017 seminar.

At a seminar panel on the topic, He Jinbi, CEO of Xi’an, China-based Maike Metals Group, remarked, “If China is not included in the global system [for price metals pricing establishment], but instead price on our own, this is inappropriate.”

He, who also is a member of the Chinese Communist Party (CCP) Standing Committee, representing Shaanxi Province, said he will advocate for the CCP’s approval of an LME warehouse to be located in Shanghai’s proposed Free Trade Port (FTP) zone.

Metals buyers and sellers in Mainland China who wish to use LME warehousing services currently “must pay unreasonable transportation costs” to access warehouses in Malaysia or Singapore, he remarked. Creating the path for an LME-bonded warehouse in a Shanghai FTP zone “with openness to the market” will be a key task during his five-year term in the National Congress, said He. “We have to make sure we have participation in global price setting.”

Professor Hu Yuyue of Beijing Technology and Business University said of some of China’s leaders, “They say ‘We should be in agreement with international norms, but we also want to stand up and set our own rules.’ But the rules must take care of the interests of both sides, or other people [outside China] won’t accept the price.”

The LME Asia Week 2018 Seminar was Thursday, May 17, at the Hong Kong Convention and Exhibition Centre.