When Hong Kong Exchanges and Clearing splashed $2.2 billion to acquire the London Metal Exchange in 2012, the Asian bourse pledged to support the British trading venue by connecting it with China, the world’s biggest commodity importer.
More than a decade later, however, the LME has made little progress on that promise and is instead faced with the risk that Beijing uses a new nickel contract to wrestle key benchmarking power from its control. But replicating LME’s global network of warehouses looks tricky.
China has long been trying to have a bigger say in the pricing of commodities. A fiasco engulfing the LME presents Beijing with a new opportunity. The saga saw the commodities exchange suspending in March last year trading in nickel for a week and cancelling trades after prices spiked to a record high. As a result, the LME is facing lawsuits with total claims of $600 million.
The debacle has undermined the venue’s benchmark status in the pricing of nickel, which is essential for making electric vehicles. LME’s trading volumes of the element were down 40% in July from a year earlier. And rival exchanges are considering launching alternatives. That’s probably why the Shanghai Futures Exchange (ShFE) is now planning its own nickel futures contract for international use, Reuters reported on Sept. 13.
China’s top role as consumer and producer supports its greater involvement in pricing. The People’s Republic accounted for 60% of the global nickel consumption last year. Tsingshan, the Chinese trader at the centre of the LME’s March fiasco, has recently started a 50,000-ton plant of refined nickel in Indonesia, which has the world’s biggest proven reserves of the metal.
Setting a new global benchmark is however easier said than done. It requires a network of reliable warehouses to hold the stuff that is pledged against the contracts. A large part of the LME’s established pricing power comes from its 450 storage facilities globally. The ShFE said in July it was seeking more space outside China. But in the 10 years since it bought the LME, HKEx did not manage to open a single warehouse in China, suggesting lack of cost saving opportunities and regulatory difficulties.
For the Shanghai exchange, venturing in the opposite route could also prove difficult. It will take time to build a physical network while setting a new warehousing standard. For China, longing for more metal clout is logical, but it will not come overnight.
CONTEXT NEWS
The Shanghai Futures Exchange is planning to launch a nickel futures contract for international use, Reuters reported on Sept. 13.
Trading volumes in nickel at the London Metal Exchange have dropped by nearly 50% since March 2022, when the venue suspended trading for more than a week after nickel prices spiked to record levels above $100,000 a metric ton.
