Hong Kong: Hong Kong Exchanges & Clearing Ltd, which bought the London Metal Exchange in 2012 for $2.2 billion, plans to start a metals trading platform in the first half of next year in southern China as it bids to secure a foothold in the world’s biggest consumer and producer of raw materials.

Grappling with a slide in volumes after a fee increase, and shrinking profits from commodities, the bourse aims to provide a marketplace for physical metals that will eventually generate benchmark prices in China. Futures in the country have traditionally been dominated by day-trading speculators and the HKEX model is specifically targeted at physical users, producers and traders.

The new trading platform will be based in Qianhai near Shenzhen, and the exchange sees it filling a gap in the mainland physical markets that it says are highly fragmented and where warehousing systems may not be reliable and financing hard to obtain. The LME has so far failed to extend its warehouse network to the mainland where the Shanghai Futures Exchange is dominant.

While China has a vibrant futures market, real physical users are not well served by the existing system and financing is expensive, HKEX Chief Executive Officer Charles Li said in Hong Kong on Tuesday. The exchange eventually wants to create a credible warehouse and logistics system for metals in China and have a platform that will enhance the country’s position in setting prices globally, Li told an LME conference. The trading platform could also tap investment from the nation’s large domestic savings, Li said.

Asked in a Bloomberg TV interview with Angie Lau whether there was any hesitation from the Chinese authorities over the plan, Li said: “No, I don’t think the Chinese government should have any issues because we’re doing exactly what the government has advocated, that is the financing sector should find safer assets and avenues of investment. Today Chinese savers can only either invest in the stock market or the property market.” For some others, it was hard to assess now how the initiative would fare.

While an independent and experienced exchange operator like the HKEX is well placed to develop a platform, it’s too early to judge, said Michael Overlander, chief executive officer of brokerage Sucden Financial Ltd “It’s a bit low on detail at this stage,” he told Bloomberg. “Obviously we can’t underestimate their influence in China, but people can buy and sell however they want in China. I’m not sure yet why they need an intermediary to do that.”

Zhu Wenjun, a copper analyst with Citic Futures Co., said there’d been bunch of spot trading platforms in China, but none had become very successful and achieved wide recognition. “Physical trading is very different from futures contracts and involves much greater cash flows. It will take time to solve all these issues,” she said by phone from Shanghai. The city’s exchange and the China Securities Regulatory Commission, which oversees mainland trading, didn’t respond to faxes requesting comment.

The underlying decline in volumes is much more related to the global economic situation than anything else such as the increase in fees, and trade from China and Chinese entities continues to grow, LME Chief Executive Officer Garry Jones told the conference. Li said he’s open to discussion on fees and they are constantly under review. The LME is the industry’s primary hub with a global market share of 76 per cent last year, according to the exchange.

While HKEX is looking to develop its presence in China, bourses inside the country are looking outwards. The Shanghai Futures Exchange and Dalian Commodity Exchange want their prices to be global benchmarks to reflect China’s importance as a user of everything from copper to crude and iron ore.

“There’s political will in China to support China’s position in global markets,” Jeremy East, interim head of global commodities at Standard Chartered Plc, said by phone from Hong Kong June 10. He pointed to the opening of an international board at the Shanghai Gold Exchange, as well as to the long-expected dollar-priced oil futures proposed by the Shanghai Futures Exchange.

“If you look ahead then you could see the possibility of gold imports being priced on that benchmark, instead of being priced against London,” East said. That could “absolutely” be replicated in metals, given China’s role as the biggest producer and consumer and the exposure of the country’s companies to risk priced in their own currency.