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LME Week Asia is right around the corner, so I want to turn my attention to our commodities business.
I was very happy yesterday to report some positive first quarter results for HKEx, boosted by increased trading turnover and, more importantly, fruits of some initiatives we began years ago that are now starting to pay dividends. One of those initiatives was our purchase of the London Metal Exchange in 2012. Back then, people wondered if it was a good move, whether Hong Kong was a natural fit for a commodities exchange, or whether we paid too much.
In hindsight, I can see why there were some skeptics. But all along our team had a clear plan for the LME that is now starting to bear fruit. The LME is a key part of our international strategy, diversifies our business and is already making an important contribution to our bottom line.
First, the numbers. We have seen a significant growth in overall revenue of the LME business, with first quarter revenue more than doubling to $647 million from $315 million a year ago, equivalent to 23 per cent of HKEx Group’s total revenue. This includes $447 million from the LME and $200 million from LME Clear. This growth comes from our new fee structure introduced in January, steady trading volume, a decrease in litigation costs, and good performance of LME Clear since it launched last September.
So things are looking up in London, and Hong Kong is coming along, too. It’s amazing to think that in 2012 Hong Kong wasn’t anywhere on the world commodities map, and today we’re just days away from the largest LME Week Asia yet, with representatives from more than 300 companies and about 100 journalists scheduled to join the Metals Seminar alone. More than 130 tables have already been reserved for about 1,600 guests at the LME Gala Dinner this year, the most we’ve ever had.
Outside our seminar and dinner, we are also seeing a budding commodities community in Hong Kong with more networking events and important discussions about the future of metals trading and hedging in Asia.
While the commodities eco-system is still nascent here, the potential is great. Last December we launched three London Metal Mini contracts on aluminium, copper and zinc, the first metal contracts traded and cleared in Hong Kong, and may well look to add more markets soon. While trading has been light on the first three contracts so far, we view them as an important breakthrough. They are like a single flame, and once more parts of the commodities eco-system are in place in Hong Kong, that flame will become a fire.
We’re also starting to see more Asian firms become members of the LME: GF Financial Markets became the first Chinese-owned company able to trade in the LME Ring when it became a category 1 member last year. China Merchants Securities (UK) was approved as a category 2 member in November, joining Bank of China International and ICBC, which recently purchased Standard Bank, while Sorin Corporation from Korea and Lee Kee Group from Hong Kong became category 5 members recently. In fact, the CEO of Lee Kee, Clara Chan, sits on the LME’s zinc and lead committees plus LME Clear’s Risk Committee.
China is also taking more – and faster – steps to open up. Just last week it was announced that 100 more state-owned enterprises will be allowed to trade commodities derivatives overseas without regulatory approval, three-times more than before. It’s another sign of China’s opening up, which will create new opportunities for everyone.
Even more importantly, the LME gave us the credibility we needed with our Mainland counterparts to begin the Mutual Market programme. Shanghai-Hong Kong Stock Connect was the first step to connect the stock markets across the border, and a connection with Shenzhen is in the pipeline. We said at the outset that the “Mutual Market” can be extended from stocks to other asset classes from equity derivatives to fixed income, currencies and commodities. Even more importantly, it allows both sides to invest in a familiar regulatory and legal environment, so there are many possibilities for future growth.
Specifically, in terms of our commodities strategy, there are essentially three things that we wish to achieve over time: (1) connect Chinese products to international liquidity and vice versa; (2) connect international liquidity with Chinese liquidity; and (3) better connect China’s physical markets to international futures market. Looking forward, by leveraging on the mutual market access breakthroughs and LME, we are in an excellent position to accelerate the internationalisation of China’s commodities markets. An internationalised commodities market not only would allow greater access by investors and users, it could also better serve the Chinese real economy. In this process, we will continue to play a humble but essential role: to build and connect.
So I’d like to welcome everyone arriving in Hong Kong for LME Week Asia. There are a number of exciting events lined up this week that should provide excellent opportunities for in-depth discussions and insights into the global metals market. I look forward to getting started next week, and to building a stronger commodities eco-system in Hong Kong.
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