Hong Kong Exchanges and Clearing (HKEx) has beat out IntercontinentalExchange in a bid to buy the London Metal Exchange (LME) for $2.2 billion. The deal, announced today, will bring the world’s largest metals market — representing more than 80% of global trading in nonferrous metals — to HKEx’s fold, helping it take advantage of demand in China. (LME shareholders are expected to approve the purchase in July.)
HKEx, Hong Kong’s only stock and futures exchange, announced earlier this year that it would expand into commodities to diversify beyond its lagging equities trading. The LME deal is plum for the exchange, as demand for metals in China has skyrocketed. (The country currently consumes more than 40% of the world’s metals.) HKEx plans to use the purchase to begin dealing in other commodities including iron ore and coal. Additionally, LME operates more than 700 warehouses around the world that store and deliver actual metals; HKEx will expand the network into Asia.
With this takeover, China will gain more influence on global metal trading prices, as LME sets global benchmark prices for metals. Its trading capacity and ability to physically deliver metals link the exchange intimately to the real economy. Although the LME is currently cleared through an external clearing house, HKEx plans to use its expertise (it already operates three clearing houses) to make LME a self-clearing exchange by 2014, further solidifying the combined exchange’s power on metals prices.
The timing of the deal seems perfect for HKEx, which has seen its shares decline nearly 10% this year as a result of the market’s slow trading and light IPO activity.