Here’s one way to ride the global commodities boom: buy the exchange that controls a big chunk of the trading. That is what Hong Kong Exchanges and Clearing did on Friday with its recommended ￡1.4bn offer for the London Metal Exchange. The price tag – at 120 times LME’s 2011 earnings – is beyond steep. But this is more than just a commercial deal. The LME is a trophy.
How badly HKEx wanted to buy the LME can be seen in the fact that it has made concessions to preserve the London exchange’s business model. That means that it will not be able to unlock any value from the deal overnight. LME will continue with the development of its own clearing house and will remain in London under the supervision of the Financial Services Authority.
HKEx wants the LME because it will bring the world’s largest metals futures exchange closer to the largest consumers of commodities. The LME has 80 per cent of the traded volume in metal futures transactions. China accounts for 40 per cent of commodity consumption but makes up just one-fifth of trading on the LME. By distributing market data in Shanghai, adopting more renminbi-denominated trades, and expanding warehousing in China, HKEx hopes that it can change that. It argues that its relationship with Beijing puts it in the best position, and it may have a point. The Chinese government is HKEx’s biggest shareholder; China Development Bank, a policy bank, is one of the four banks putting up the ￡1.1bn bridging loan the exchange is using to pay for the deal.