Global demand fuels new trading market

Hong Kong (SANEPR.com) September 9, 2008 -- The move aims to capitalise on the worldwide demand for commodities and the Chinese mainland's increasing role in setting prices for petroleum and other raw materials.

The HKMEx will initially sell fuel oil contracts in US dollars for delivery to the mainland, where it is often used in the shipping and industrial sectors. Potential investors include global investment banks Barclays Capital, Lehman Brothers and Merrill Lynch, end-users such as the Noble Group and major mainland companies, including Citic Group and China Resources.

The exchange will be headed by oil industry veteran Barry Cheung. The former Deputy Chairman of the Titan Petrochemicals Group said the timing is right.

"Commodity trading and consumption in China and Asia have been growing at an unprecedented speed over the past few years," Mr Cheung said. "At the same time, there are insufficient hedging mechanisms for these products. The exchange will provide more price relevancy that better reflects mainland China's underlying supply and demand and enable Chinese traders to have more pricing power in the world's commodities markets."

The mainland, the world's second-largest oil consumer behind the United States, uses Singapore futures as a reference for fuel-oil bargaining.

Planned launch in 2009

The HKMEx expects to start trading in the first quarter of next year, pending approval from the Hong Kong Securities and Futures Commission, likely by the end of the year. It is open only to institutional investors. The new exchange will operate on an electronic platform during the Asian hours of 10am to 5:30pm, but will eventually extend its operation to 23 hours a day. Mr Cheung added that the HKMEx plans to expand trading into other commodities shortly after its launch.

"What we're offering is a product not currently available on the market: fuel oil contracts that are freely traded in US dollars and delivered in China," Mr Cheung said. He added that it also caters to end-users because of the exchange's ability to arrange for physical delivery. One investor, oil storage and transport firm Titan Petrochemicals Group, expects its bonded petrochemical storage facilities in southern and eastern China to be designated HKMEx physical delivery points. The arrangement, according to the HKMEx chairman, would equip the exchange to be one of the best fuel oil futures markets in the world.

Hong Kong Financial Secretary John Tsang welcomed the setting up of the new exchange. "Hong Kong's continued success as an international financial centre depends very much on our ability to diversify and expand the range of financial products available here."

Commodities he added, "will be our key focus from now on, and the establishment of an oil futures market in Hong Kong will fulfill the needs of the mainland and also those of the multinational oil-users and traders in the region."

Bridging the gap

Mr Tsang also stressed the importance of the mainland, which has commodity exchanges in Shanghai, Dalian and Zhengshou, having its own fully fledged oil market platform. Hong Kong, he said, can help bridge the gap because the city can readily house an oil derivatives market under its existing regulatory system. None of the mainland exchanges, including oil futures trading in Shanghai, is currently open to international traders.

The HKMEx chairman said times have changed since an attempt, 20 years ago, to launch a commodities market in Hong Kong failed.

"It wasn't successful then because the need at the time wasn't quite there," Mr Cheung said. "I think that circumstances are very different today, with a growth in commodities imports, with the sophistication of the users. We believe we have a very good chance of making this exchange a success."

This article is produced by the HK Trade Development Council.