We’re four weeks away from LME Week Asia, and we’ve been busy gearing up to welcome the global metals trading community to Hong Kong for the first time. LME Week Asia is the Asian edition of LME Week, which is a major event held in London each October. LME Week brings together members of the metals community to network, discuss trends, and learn about growth opportunities, and it has become a cornerstone event for the LME each year over the past several decades.
We’re extremely excited to be holding LME Week Asia in Hong Kong this year, and are thrilled with the response. It will be a key opportunity for commodities traders here and around Asia to learn more about the LME’s business, and for metals traders around the world to learn more about current trends in the Asian commodities sector. To countdown to the opening of LME Week Asia, I’ll be writing a series of blogs over the next few weeks to update you on the developments in our commodities business and how the business fits in with what we’re doing here in Hong Kong.
Commodities trading is unfamiliar to many people in Hong Kong and developing a successful commodities business is a huge challenge. Our acquisition of the LME put us firmly on the leadership map of global commodities exchanges. What I’d like to share with you today is how to make it work from here.
Simply put, our commodities strategy has three key objectives:
- To make the LME’s existing base metals business grow faster by lowering barriers to access, particularly from Asia;
- To extend our commodities platform from London to Asia by launching new capabilities and new products, particularly into Hong Kong;
- To extend our base metals business into other commodities by developing strategic partnerships and relationships, particularly in China.
How will we achieve these objectives? I’d like to explain by way of the house analogy I used in my last blog. There, I showed how the investments and strategic steps we have been taking for the HKEx business as a whole over the last few years are like laying the foundations of a house, building firewalls, renovating the interior structures and finding ways to attract people to visit and live in our house. The acquisition of the LME allowed us to add an entirely new section to our house – a new commodities extension. I’d like to tell you how we plan to make this extension an integral part of our house.
The new LME section of our house already has a strong ‘West Wing’ – its leading position in base metals worldwide out of London. But although it already has a solid Asian business, the LME could further build its ‘East Wing’ for its Asia-based clients that is well aligned with the rest of the house:
- Trading in LME’s existing products by Asian users, particularly from China, is still not free from regulatory and other barriers, both in London and in Asia;
- The LME’s infrastructure and product development capability are not well-adapted to support successful extension into Asia; and
- The LME is yet to find strategic partner among key players in China.
So the first stage of our strategy is to take the LME’s existing Asian business and make it work better. For this stage it is not about monetary investment or infrastructure build-out. It is about finding ways to make trading on the LME easier, more accessible and more attuned to Asian clients’ needs so that they trade more. The first thing we’re going to do is to enhance the Asian time zone price discovery mechanism to serve certain Asian users. We are making good progress there and I hope to be able to share more details with you in another blog shortly. A second barrier to entering the ‘East Wing’ for Asian guests is that to become an LME member you have to have an office in London. We are exploring to see whether there can be a better way to connect with Asian players. We are also working on RMB clearing in London and expansion of the warehouse network in Asia. Last but not the least, we have to promote the LME to Asian users so we can attract new guests to stay in our ‘East Wing’, and that’s what LME Week Asia is about.
The second stage of our strategy is to give our commodity extension a good infrastructure. This stage will require significant investment of time and money, but it will be worth it and the payback will not be only in financial terms but also in strategic value. One of the big investments we are making is to set up LME Clear. At present, the LME relies on a third-party clearing house to clear and settle its trades, which means that we don’t fully control our own destiny, particularly with regard to speed and flexibility of product launch. Taking clearing in-house through the establishment of LME Clear will speed up time-to-market for new products as well as enable us to capture the related revenue. Financially, LME Clear will be generating meaningful income from its first day of operation, so we would expect it to recover its own set-up costs in the near term. LME also presently outsource their IT operation, and again we are taking that in-house to improve efficiency and develop IT capability as a strategic asset. Finally, we will invest to make our Hong Kong-based trading and clearing systems commodities-enabled.
That brings me to the third strategy we have for our commodities ‘East Wing’ – bringing in more guests. This is about developing mutual product listing/licensing arrangements and forming strategic partnerships with leading exchanges. Especially Mainland China institutions would be key partners for us given the sheer size of the Mainland market and the Mainland’s need to internationalise. These partnerships would ultimately take us beyond metals and into other commodities. We are exploring products related to metals, such as coking coal and iron ore, but we would also like to extend eventually to soft commodities and agriculture as opportunity permits. This will in turn make our market more attractive to existing and potential new users, ensuring that our ‘East Wing’, once expanded, is fully utilised. We’re confident we can achieve this because our ‘East Wing’ will be designed to help our potential partners achieve their aspirations of internationalisation and global leadership.
That’s our plan for taking the LME forward in Asia. What does it mean for Hong Kong? We think it will mean a lot because Hong Kong will be at the centre of our expansion plans – our ‘East Wing’ is located right here. New users and existing users will be channeled from the Mainland to Hong Kong or through Hong Kong en route to London, and vice versa. Asian time zone pricing, and ultimately Asian time zone clearing, will involve Hong Kong although the details are yet to be worked out. And Hong Kong and Asian investors and intermediaries may find it interesting to explore the growing range of commodity products we will be bringing here.
There’s a lot to talk about as we gear up for LME Week Asia next month. I can’t wait to get the conversation started, and hear your ideas as we team up with the LME to build a successful commodities market in Hong Kong.
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