Challenges and Opportunities in Expanding to China
Expanding the LME’s network of warehouses to China has faced challenges due to Chinese regulations and the resistance of the local competitor, Shanghai Futures Exchange (ShFE). However, recent pressure on Chinese exchanges to innovate and expand throughout Asia has brought about changes. ShFE is considering expanding its metals warehousing network beyond China’s borders, while the LME plans to launch new metals contracts using prices from the Shanghai Exchange.
At present, the LME approves warehouse locations in countries with significant consumption and import of industrial metals. Hong Kong’s imports of copper and aluminium are only a fraction of global supplies, making it less attractive in this aspect. The LME mentions in its presentation that Hong Kong is not a typical base metals storage center and does not currently receive significant inflows of metal due to the presence of cheaper nearby ports.
Within the LME’s existing Asian network, good delivery locations include ports in Taiwan, South Korea, and Malaysia, all of which offer more cost-effective storage options compared to Hong Kong. Singapore is also part of the LME’s network, but it is relatively more expensive and primarily serves as a transit location. Rent in Hong Kong is a concern, with potential costs reaching up to four times the maximum rent charged by warehouses in the LME’s system. The LME acknowledges this by recognizing that warehouse rents would need to be subsidized by the Hong Kong government to make it a commercially viable option.
Further support from the Hong Kong government could include granting recently warranted LME metal “fast-tracked” customs status across the mainland border. Reuters reached out to the Hong Kong government and HKEx for comment, but responses were not immediately provided.