The London Metal Exchange’s newly approved warehouses in the Hong Kong Special Administrative Region will thrive thanks to the Chinese mainland’s vast metal industry — despite a worsening trade war that has unsettled global markets, one of the facilities’ operators said.
The HKSAR has a uniquely advantageous location on the edge of the world’s largest consumer of commodities, said Jason Li, chief executive officer of GKE Metal Logistics Pte, which is set to operate two of the first four LME-licensed depots and is in the process of adding a third. It also has the benefit of a reputation for transparency and access to large financial institutions, he added.
“There are so many smelters in China. I would be overwhelmed if each of them gave me business,” Li said in an interview in Singapore, where GKE is based and was founded more than four decades ago.
The LME, acquired by Hong Kong Exchanges and Clearing Ltd in 2012, has long sought to establish a warehousing foothold inside the mainland. In January, it announced that it had approved the HKSAR as a location for the first time, allowing selected storage depots there to hold its main base metals, including copper, zinc and aluminum.
The exchange’s large network of approved warehouses stretches across the world and at times hold millions of tons of metal, in an effort to ensure prices on the exchange are anchored to the real world and to serve as a backstop for consumers and producers.
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GKE — which competes with rivals like Istim Metals LLC and C. Steinweg Group, and runs depots monitored by Chinese exchanges on the mainland — received approval in April to open its first storage business in the HKSAR. Li said space and costs could be worked around, for anyone able to find the right location and logistics.
Location, location, location
The company’s LME facilities in the HKSAR, a venture with China Resources Logistics, are located on the south shore of Kowloon and cover about 20,000 square meters, according to Li. The floor-loading strength of the warehouse area, which decides the amount of metal that can be stored, can reach 10 tons per square meter, he said — above the LME’s minimum of five tons per square meter.
“The key point is to find the right places,” said Li, a veteran who has spent more than three decades in the industry. “Lots of sites I surveyed in Hong Kong could handle much less weight, which would limit the type of metal and the size of the business.”
Metals held in the HKSAR will likely be of higher value, including copper, nickel and tin, he said. Moreover, at a time when seaborne freight is increasingly expensive, more customers will look for warehouses that can lean on predictable land transportation — and the HKSAR’s bankers will find comfort in having any pledged metal within reach, Li added.
Commodities logistics industry on the mainland has evolved dramatically in recent decades, thanks to skyrocketing demand and increasingly sophisticated financial products.
Li said proximity to the mainland's manufacturing would bring the industry closer, and make it easier to arbitrage demand. It would also return the logistics business to its original purpose. “I believe the warehouse business in Hong Kong will remind people of what we were doing a decade ago, when profits were basically driven by physical, derivatives trading and financial services, among traders, logistics firms and banks,” he said.
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The new depots, including others operated by Henry Diaper & Co and PGS (East Asia) Pte, will be able to start storing LME-warranted metal in three months’ time, the exchange said earlier in April.
