(Bloomberg) -- The London Metal Exchange has approved Hong Kong as a warehouse location for the first time as the bourse seeks a stronger link to mainland China — the world’s biggest metals market.
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The Hong Kong storage depots will be permitted to hold its main base metals, including copper, zinc and aluminum, the LME said in an emailed statement. It will become an active delivery point three months after the approval of the first warehouse company and location.
The warehouses will add to the bourse’s sprawling global network that at times holds millions of tons of industrial metals. The LME has long wanted sheds in mainland China to make it easier for clients there to deliver or withdraw metal, but its ambitions have been stymied by Chinese regulators. Hong Kong at least offers a closer alternative to existing options in South Korea, Taiwan or Malaysia.
“Hong Kong provides the natural hub for connectivity to the Chinese market that is so important to market participants and the wider metals industry.” Matthew Chamberlain, the LME’s chief executive officer, said in the statement. There has been “significant interest from warehouses, landlords and metal owners” in the plan, he said.
Getting Closer
The LME does not itself operate warehouses, but licenses third-party companies to run them, according to the bourse’s global regulations. The next step in the Hong Kong project is for warehouse firms to apply to the LME.
A nearer delivery point should blunt price disparities between China and the rest of the world, reducing opportunities for arbitrage trades, according to traders. It could also facilitate more Chinese exports as domestic capacity keeps growing.
Despite a sharp economic slowdown in recent years, China’s economy remains a lynchpin of trends in global metals markets. The LMEX Index of six base metals just capped a modest annual gain last year, with signs of supply stress for now outweighing softer demand in the Asian nation.
To be sure, there are doubts about the efficacy of warehouses in Hong Kong given the city’s relatively high costs for property, labor and logistics. Super—efficient ports on the coast around Shanghai have long hosted the biggest storage points for mainland China.