Hong Kong economic pain is marginal gain for LME
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Hudson Lockett
HONG KONG, Oct 4 (Reuters Breakingviews) -There are upsides to any downturn. Hong Kong’s economic slowdown and the resulting glut of unused land have opened an opportunity for a new business: storing metals en masse.
The London Metal Exchange is on track to approve metals warehousing in the city before the end of the year, Reuters reported on Tuesday, citing three sources with knowledge of the matter. That would be a boon for all concerned even if the British bourse, which is owned by Hong Kong Exchanges & Clearing 0388.HK, would prefer to park its metals nearer to buyers in mainland China.
The prospect of opening warehouses in the People’s Republic was one of the eventual benefits HKEX touted when it bought the LME more than a decade ago. Closer physical storage would make deliveries of the metals that underly London-traded futures contract quicker and cheaper, encouraging more Chinese buyers to participate in the market.
Despite its change of owner, however, the LME has made little progress. Regulators in China instead prioritised the warehousing networks of domestic markets like the Guangzhou Futures Exchange, which launched in 2021 with a mandate to focus on materials such as lithium carbonate, a key ingredient for electric vehicle batteries. At the end of August, China accounted for just a fifth of the LME’s inventory, after deducting stock earmarked for delivery.
Yet, Hong Kong is more convenient than current LME warehouses in Taiwan, Malaysia, and Singapore, all of which require overseas shipping to reach the world’s second-largest economy. These locations housed 45% of the LME’s nickel at the end of May.
Hong Kong’s downturn helps. Container throughput at the city’s port is down a third from pre-pandemic levels and will probably remain depressed due to competition from rival shipping hubs. That creates space for temporary warehousing. Harbourside facilities would allow local logistics groups to start servicing clients at speed while the LME looks for long-term locations closer to the Chinese border. Until recently, stratospheric property prices made affordable storage space hard to come by.
That Hong Kong is scrambling for opportunities created by slowing growth and business lost to mainland rivals is hardly ideal. But the financial hub’s appeal has always been providing access to a larger and less-open Chinese market. Second place may want for gold and glory, but any metals trader worth their salt will take so-so silver over shameful bronze.
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CONTEXT NEWS
The London Metal Exchange is set to approve metals warehousing in Hong Kong before the end of this year, Reuters reported on Oct. 1, citing three sources with knowledge of the matter.
The LME, which is owned by Hong Kong Exchanges and Clearing, has been working with local authorities to line up temporary warehousing space at the city’s port to use before eventually moving to sites closer to the border with mainland China, per Reuters.
Graphic: Hong Kong's post-Covid port activity remains subdued https://reut.rs/3Ybqumk
Editing by Peter Thal Larsen and Ujjaini Dutta
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