June 25 (Bloomberg) -- Barclays Plc, Morgan Stanley and Citic Group may help start a commodities exchange in Hong Kong to tap growing raw materials demand from China, the world's second-largest oil consumer.

The proposed exchange will start in the first quarter of 2009 and will offer dollar-denominated fuel oil contracts for delivery into China, Barry Cheung, chairman of Hong Kong Mercantile Exchange, said in an interview yesterday.

Oil and copper futures soared to records this year in New York and London, as investors seek alternative assets to a weak dollar and declining equities. Hong Kong wants to bolster its position as an Asian trading center as rivals Tokyo and Singapore offer commodities trading.

``It's a very difficult market to crack into because the investment community isn't familiar with fuel oil,'' Akira Kamiyama, a trader at Mitsui & Co., said in Tokyo. ``Physical fuel oil traders would have interest but their participation alone won't be enough to provide liquidity.''

Hong Kong is trying to succeed where rival Singapore has stumbled. Singapore had previously scrapped two crude oil contracts and two fuel contracts because of lack of interest.

Good Time

``We think this is a good time to do it because the volume of commodity imports into China has grown tremendously last year,'' said Cheung. ``Though there are similar contracts in Singapore they don't quite meet the needs of people who are importing fuel oil into China.''

China imported 2.86 million metric tons of fuel oil in May, 17 percent more than a year ago, according to customs data. Commodities trading in China reached a record in 2007.

The proposed commodities bourse, which will be privately owned, has also attracted interest from Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Noble Group Ltd., Cheung said. The shareholding structure will be decided in a few months, he said.

The Hong Kong bourse plans to introduce other commodity contracts, Cheung said, without giving details. It expects to get approval to operate from the Hong Kong Securities and Futures Commission by the end of this year.

Cheung's exchange may compete with the Hong Kong Exchanges & Clearing Ltd., operator of Asia's third-largest stock market.

Possible Competition

The Hong Kong Exchanges and Clearing, which plans to introduce gold futures in October, won't rule out the possibility that it may offer oil futures, Chairman Ron Arculli told reporters today. It is also studying carbon emissions trading, Arculli said.

Still, commodities isn't a priority now, Arculli said.

``It would be great for Hong Kong as an international financial centre if the commodities exchange succeeds,'' Arculli said. ``What tops our agenda is to attract top-tier overseas companies to list here.''

Cheung is a former deputy chairman of Titan Petrochemicals Group Ltd., the tanker and fuel-storage operator partly owned by Warburg Pincus LLC.

Investments in funds tracking the Standard & Poor's GSCI Index and Dow Jones-AIG Commodity Index rose to $250 billion from $169 billion at the start of the year, Sanford C. Bernstein & Co. said April 30.

To contact the reporters on this story: Theresa Tang in Hong Kong at ttang3@bloomberg.net; Nesa Subrahmaniyan in Singapore at nesas@bloomberg.net

Last Updated: June 25, 2008 06:16 EDT