| SYDNEY/HONG KONG, March 31
SYDNEY/HONG KONG, March 31 Earlier this month,
the chief executive of Hong Kong Exchanges and Clearing
, Charles Li, was eager to talk about anything but the
years-long warehousing crisis at the London Metal Exchange.
At a lunch with reporters, Li brushed aside questions about
forthcoming rules that should once and for all break through the
logjams in the LME's vast storage network, which end users
including brewer MillerCoors alleged had artificially choked
supply and inflated prices.
With the seal of approval from British regulators, after
months of consultation, Li told Reuters he was "done" with the
issue and intended to focus on the lucrative opportunities
offered by China's internationalisation of commodities trade.
Not quite yet it seems.
A British court last week upended the plan, saying the
rule-making process was "unfair and unlawful" because the LME
had presented only one viable option: reduce queues by limiting
how much can be brought in and out each day.
It was a blow for Li, who has taken a leading role in fixing
a problem that has been a thorn in the side of the exchange and
efforts to wring profits from the $2.2 billion LME takeover.
Michael Lion, Chairman and Director of Sims Metal Management
Asia in Hong Kong, said he did not think Li's reputation would
suffer personal damage from the set back.
"The question marks around him are will the underlying
conditions (in China) enable him to complete the vision that
will make the acquisition... as viable as they hoped?"
Nonetheless, Li faces a renewed drive to fix a problem that
has divided the industry and delayed his plans to overhaul the
137-year old exchange, which has so far dragged on HKEx profits.
The Hong Kong exchange has said it was disappointed with the
ruling and declined to comment on questions about whether it
could hit its LME growth plans.
Last month, the exchange reported a lower-than-expected 11
percent rise in annual earnings, as almost HK$800 million ($103
million) in operating expenses from the LME offset a recovery in
stock trading volumes last year.
Some of those costs came from the LME building its own
clearing house, LME Clear, which should begin contributing fees
when it launches in September this year. The Hong Kong exchange
pledged not to raise fees until at least the start of 2015.
Li, a past executive at JP Morgan Chase and Merrill Lynch's
China operations who has worked for several law firms in New
York was blooded in commodities as a young man, working in the
offshore oil fields of the North China sea prior to college.
Now well connected to China's elite, Li, 52, is regarded as
by some in the industry as a "visionary" who will get the job
done. He had had his eye on the LME since early 2010, just three
months into his new job as CEO of HKEx and well ahead of the
starting gun for the LME sale that was wrapped up in 2012.
"He certainly wears his heart on his sleeve as far as what
his ambitions are," said Lion, adding Li was refreshingly not
afraid of controversy.
Indeed, one of Li's first acts after HKEx's purchase was to
pledge an overhaul of the LME's warehousing network, promising
in October 2012 to aim "a bazooka" at the problem.
In last week's High Court ruling, the judge published
previously undisclosed emails between LME executives that
revealed the extent of Li's involvement in the process.
In an email in March last year, Matt Chamberlain, who was
hired by Hong Kong to run the consultation and implement the
changes, described the plan to link delivery rates to inflows
into warehouses with big queues as the "Charles solution".
In the email, Chamberlain gave LME management two options:
keep the status quo or push ahead with "Charles' plan".
Warehouses registered by the LME at ports around the world
are supposed to allow companies that need metal to take delivery
of supplies against the exchange's futures contracts.
But in recent years, banks and traders bought warehouses,
stockpiled mostly aluminium in their depots and delivered it out
at the minimum pace thus driving up the costs for metal used to
make industrial products from soft-drink cans to aircraft.
Wait times that had initially prompted a few grumbles in
earlier years got even longer as the new warehouse owners
concentrated metal into facilities at single locations.
Facing intense regulatory and political scrutiny and
embroiled in class-action lawsuits, the LME announced last
November sweeping reforms to force storage facilities with long
queues to deliver metal out at a significantly faster rate.
In the plan that was supposed to come into force on April 1,
the pace of deliveries would be linked to the inflows of metal.
The warehousing issue has been diverting attention away from
Li's core strategy: to capitalise on growing global yuan trade
by developing commodity benchmarks, before turning to the
broader and more lucrative currencies and fixed income markets.
The exchange is expected, as soon as next month, to announce
new products including a yuan denominated copper contract.
"There are some in London who think it's not going to happen
or it's not going to work. But they have to try, and they are
trying," an executive at an LME ringdealer said.
Li's connections could also help pave the way for the LME's
prized aim of opening up warehouses in China.
The LME suffered a setback last October, when a Chinese
government source said that Beijing will retain a ban on
overseas commodity exchanges setting up warehouses, dashing
hopes that the launch of Shanghai's Free Trade Zone could mean a
thaw in the authorities' position.
Chinese trading house Maike has been building warehouses in
the zone and the company is seen as a likely contender to become
the next new Chinese LME member.
A key obstacle has been resistance from local exchanges
reluctant to see fresh competition on their home turf.
But Li's plans to co-list commodity contracts on the HKEx
are seen as a peace offering to China's commodities exchanges
and a step towards his goal of gaining warehouses in China.
The clock was ticking, but it was too early to come to a
judgment yet, said the LME ringdealer executive, noting that
Li's LME initiatives would take time.
"He's going to have to show a return on the high price tag
which won't be easy."
($1 = 7.7573 Hong Kong Dollars)
(Additional reporting by Susan Thomas and Veronica Brown in
London; Editing by Jonathan Leff and Ed Davies)