The HKEx, which has the Chinese government as its largest shareholder, beat off competition from the US-listed Intercontinental Exchange (ICE) in a closely fought battle.
The takeover will provide a significant boost to the LME’s plans to expand in China if the deal is completed during the fourth quarter of the year, as anticipated.
However, fears have been raised that placing the entity that sets prices for industrial metals globally in the hands of the biggest consumer of industrial metals globally may not be a sensible move for the rest of the world. The Chinese government chooses the chairman and chief executive of the Hong Kong Exchanges and Clearing, as its largest shareholder.
Some analysts have also expressed concerns that the HKEx may be over-paying for the LME.
Martin Abbott, chief executive of the LME said: “This proposed combination will secure the future of the LME for its next 135 years. The LME’s global benchmarks plus HKEx’s pre-eminent market position in Asia, its IT and trading resources and clearing expertise will cement the LME’s position as the world’s foremost base metals trading venue.”
The LME, which was established in 1877 above a London hat shop, accounts for 80pc of traded volume in global metal futures transactions. Its building on Leadenhall Street in the City financial district is one of the last bastions of open outcry, with futures in metals including copper, aluminium, zinc, lead, tin and nickel still changing hands in so-called ring trading, as well as electronically and over the telephone.
HKEx will part finance the acquisition through a £1.1bn pound bank loan. Any deal would have to be accepted by 75pc of its shareholders including JP Morgan, which could receive £151m and the Bagri family, owners of Metdist, who could be handed £130m.
“This is a transformational milestone for Hong Kong,” Charles Li, chief executive of the HKEx added. “You have the biggest exchange, the biggest market and a lot of inefficiency.”
China is the world’s leading consumer of commodities so gaining influence over the pricing and warehousing of those commodities is crucial to China and owning the LME would deliver that. The advantages to Chinese industry, over rivals, are obvious. It is therefore very surprising that no one in Europe, or the UK, has realised the importance of this putative deal.
The LME doesn’t physically own the warehouses but it does regulate them – thus dictating terms to the site owners. The LME is a hugely strategic piece of market infrastructure which should not fall into the hands of any one government. But it is a “must have” asset for China which is bidding for it through the state controlled Hong Kong Exchanges and Clearing. That’s why it’s willing to pay more than £1bn for it, even though the LME makes only about £10m in profit – a multiple that even Facebook couldn’t command in its over priced IPO.
It’s not at all clear what Hong Kong Exchanges and Clearing would do with the future of metals trading in the UK but if activity moved away from London to Hong Kong allied activity in the City of London would likely follow.
Given the LME’s dominant position in the trading and price discovery of industrial metals it would be impossible for a rival exchange to develop. Once infrastructure such as the LME has gone, it’s gone forever.http://alternatenewsmedia2012.wordpress.com/2012/06/18/china-taking-over-london-metal-exchange/