In this Sept 27, 2018 photo, traders work on the floor of the London Metal Exchange, in London, Britain. (PHOTO / REUTERS)

LONDON – The London Metal Exchange is studying Hong Kong as a location to expand its global metal warehouse network, five sources with knowledge of the matter said, hopeful success there might open the door to the Chinese mainland, its ultimate target.

Registering warehouses in the mainland, the world's largest consumer of industrial metals, to store metal traded on the LME has been a strategic aim since Hong Kong Exchanges and Clearing bought the LME in 2012 for $2.2 billion.

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In a presentation made to the LME's warehousing committee in December, seen by Reuters, the exchange said companies in the region had indicated interest in Hong Kong as a place to store industrial metals as an alternative to the mainland.

The LME actively engages with industry participants worldwide to ensure the LME warehouse network continues to provide maximum global connectivity for the metals community.

London Metal Exchange

"Around ten domestic and regional LME market participants ... have recently expressed interest in this initiative directly to the LME or through the HKEMCA (Hong Kong Energy, Mining and Commodities Association)," the LME's presentation said.

An LME warehouse in Hong Kong could be seen as a showcase for in-depth cooperation between the mainland and Hong Kong, the presentation said. It also said Hong Kong as a good delivery location (GDL)"closes gaps in the LME's delivery network that have frustrated some Chinese customers".

HKEMCA did not respond to a request for comment.

"The LME actively engages with industry participants worldwide to ensure the LME warehouse network continues to provide maximum global connectivity for the metals community,” the LME said in response to a request for comment.

"When assessing potential new delivery points, we consider a number of important criteria ... we also discuss these with the relevant LME advisory committees before communicating with the market."

No timeline for the proposal was given by any of the sources, but several hurdles stand in the way of listing Hong Kong as a GDL, the sources said.

Shanghai Futures Exchange and the China Securities Regulatory Commission, which would approve LME warehouses in the mainland, did not respond to requests for comment.

Typically the LME would only approve locations in countries which consume and import large amounts of industrial metal.

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Hong Kong's imports of industrial metals such as copper and aluminum are a small fraction of global supplies, which the LME referred to in its presentation. 

Singapore is also included in the LME's network, but it is more expensive and though it doesn't consume large amounts of metal, it is used as a transit location.