REFILE-London Metal Exchange, Hong Kong owned, can hold off rivals

* Warehousing, potential fee rise open chink in LME's monopoly

* Shanghai is most visible threat, CME and ICE in the wings

* Rivals' efforts unlikely to dislodge LME soon

By Susan Thomas

LONDON, Sept 11 (Reuters) - Rivals exploiting concerns among its clients to challenge the London Metal Exchange's (LME) near monopoly of the multi-billion dollar trade in materials like copper and nickel are unlikely to make big inroads soon.

Hong Kong Exchanges and Clearing's (HKEx) 1.4 billion pounds ($2.2 billion) purchase this year of the LME, the world's biggest industrial metals marketplace, will smooth its way further into China, helping it cement its 80 percent global market share.

But anger about a log-jammed warehousing system that has undermined the LME's role as a market where industrial users can always get the metal they need, and the prospect of the HKEx raising fees once an agreed moratorium expires in 2015, have opened a chink in the LME's armour.

The biggest, most visible threat is posed by the Shanghai Futures Exchange (SHFE), where copper contract volumes surged 162 percent in January to August this year compared with the same period last year, according to exchange data.

"Some people are unhappy. The LME might not remain the principal reference price forever," said Macquarie analyst Duncan Hobbs. "As China becomes more important, it's possible a Chinese exchange could provide serious competition to the LME."

The SHFE is the biggest alternative to the LME for metals trading, listing 10 futures products including copper and aluminum. It lowered its user fees for some products last month, just weeks after LME shareholders voted in favour of the HKEx deal.

Many LME users had feared a sale might alter its unique, complex structure of futures trading and end its system of low fees.

HKEx Chief Executive Charles Li has promised that until at least Jan. 1, 2015, his exchange will preserve the LME brand, its open-outcry trading and unique structure. But some analysts argue that fees would have to rise after that to justify the hefty price tag.

It wasn't just the money that tilted the LME in favour of Hong Kong, which has vital strategic access to China.

"I think realistically, in terms of competition for the LME, look to Shanghai. That's where they saw the growth and that's where they saw the threat and that's why they thought they should tie up with Hong Kong," Berenberg exchanges analyst Richard Perrott said.

China is the world's largest consumer of commodities but its influence on global pricing is muted as the exchanges where resources are traded are located in the West. That will change as Beijing opens up its commodity derivatives market and encourages its commodity brokerage firms to venture abroad.

FAILED SUITORS

Failed LME suitor CME Group Inc, the biggest U.S. futures market operator, has taken market share from the LME's copper contract and announced plans for a new London-based exchange. It has also canvassed traders on an aluminium contract to rival that of the LME, industry sources have said.

IntercontinentalExchange, whose offer for the LME was just short of HKEx's winning bid, has no base metals presence now but may also step into the fray, traders and industry sources have said.

"I think the LME has made it slightly easier for somebody to set up a competitive exchange than it would have been in the past. I think that must be quite worrying for the Hong Kong exchange," one metals industry executive said.

But none of those efforts can hope to usurp the 135-year-old LME any time soon. Last year it achieved record volumes equivalent to $15.4 trillion, according to LME data.

For a start, the SHFE is still closed to many outside investors, and, officially, foreigners cannot easily repatriate profits. While Beijing has begun to open its markets, the process could be slow and uncertain as the country focuses on a new senior political leadership.

The CME has recently taken market share from the LME's benchmark copper contract, with trading volume in its COMEX contract rising more than 50 percent in the year to the end of July. The LME's copper contract, the global benchmark, has gained just 16 percent.

But the COMEX volume is still just one-fifth that of London.

Last month, CME announced plans to launch a London-based European exchange and expand its customer base. It will offer currency futures first, and add contracts tied to other assets at a later date.

It made no mention of launching metals products on the new exchange and, although there is nothing to prevent it from doing so, it wouldn't have an obvious competitive advantage if it did, Perrott said.

"LME has an extensive warehousing network and historically the support of the leading industrial metals traders," Perrott said.

To copy the vast global network of warehouses registered by the LME that enables its contracts to be physically delivered is no easy task.

Bitter complaints about the LME system, where it can take weeks or months to withdraw metal from certain sheds, while operators profit from high rents, has yet to translate into concrete action to develop alternatives.

"The bar to getting into the base metals arena with a physically backed contract is very high. Replicating the LME warehouse system would be a huge task," said a second executive in the metals industry.

Nevertheless, the LME and its new owner are taking note of the potential challenges to its status from Shanghai, CME, and possibly ICE. And critics of the LME have applauded the hint of greater competition as an incentive for the LME to improve.

"As a market participant I welcome that, because I think in a world of monopoly sometimes change and adjustment are harder to force," said a senior metals trade executive. "If you've got competitive forces it's a lot easier to get changes made."