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Hong Kong’s New Oil Futures Market

June 26, 2008

In a move aimed at strengthening Hong Kong as the financial capital of China, the Hong Kong Mercantile Exchange on June 25 unveiled plans to launch its first product, oil contracts, by early next year. The exchange wants to capitalize on the booming demand for commodities in resource-hungry China. “There is a huge opportunity to develop a commodities futures market that can cater to the mainland,” said John Tsang, Hong Kong’s financial secretary, in a statement accompanying the announcement of the new plan.

Hong Kong’s exchange isn’t the only one looking to capitalize on Chinese demand. The announcement came just days after the Chicago Mercantile Exchange (CME) opened its new Asia Pacific headquarters in Hong Kong. The new CME office, opened June 20, illustrates the growing importance of the region for commodities trading. For example, crude oil consumption in China grew at a compound annualized rate of 7.7% between 2001 and 2007.

Yet while China is one of the world’s biggest consumers of oil, it has had little say in the pricing of oil globally. “With rapid commodity imports comes the need for customers to be able to hedge their pricing exposure,” Barry Cheung, the exchange chairman, said at a press conference in Hong Kong on June 25. Futures markets in New York and London are the main price-setting mechanism for oil, while Dubai is making efforts to establish itself in energy futures.

Shanghai Futures Aren’t Open to Global Traders That has particularly handicapped refiners such as PetroChina and China Petroleum & Chemical, better known as Sinopec. The two state-owned giants must pay global fuel oil prices, but are constrained by price controls on the products they can sell to domestic consumers.

Although China has three commodities exchanges of its own in Shanghai, Dalian, and Zhengzhou, they specialize in metals and agricultural products. While the Shanghai exchange has been trading oil futures based on physical delivery since August 2004, it only covers oil once it is imported; hence it’s not fully integrated with international pricing. It is also priced in yuan and not open to international traders. “For oil traders or importers in China, these contracts do not meet their needs,” says Cheung.

The potentially lucrative exchange has not yet decided on its shareholding structure, though a number of traders and financial institutions including Barclays Capital, Citic Group, Lehman Brothers (LEH), and Nasdaq OMX Group (NDAQ) have indicated their desire to become strategic partners in an initial round of funding designed to raise about $50 million




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