Shanghai will more than double its so-called bonded warehouse space this year amid speculation the world’s biggest harbor will host the first London Metal Exchange-approved delivery point in China, the biggest user of base metals.
Shanghai will add 80,000 to 90,000 square meters for metals storage by the middle of this year to an existing 50,000 square meters, said Eric Ni, a business development manager at Shanghai Free Trade Zones United Development Co. Bonded warehouses are exempt from tariffs and a value-added tax.
Increased space may boost trading volumes for metals after record copper inventories forced warehouses to stack stocks outdoors last year. It also reflects optimism that HK Exchanges & Clearing Ltd.’s acquisition of the bourse in December will clear the way for LME-approved facilities in Shanghai. China’s warehouses aren’t allowed to be used for delivery for futures products traded on overseas exchanges.
“The increase in area in 2014 may be even larger than this year,” Ni said in an interview on Jan. 7. “Major market participants have high hopes that the LME will be able to have delivery warehouses in China in the next few years with the help of the Hong Kong exchange.”
The LME has a network of more than 700 warehouses around the world. Chinese buyers currently have to secure metals from the closest locations in Asia, such as Singapore and Busan, South Korea. Ni’s company is developing Yangshan port, one of Shanghai’s three free-trade zones, where imports are placed in bonded warehouses.
Maike Investment Holding Group Co., China’s biggest copper trader, has invested $100 million to build warehouses that can store 600,000 tons of metals in Yangshan port, hoping to make them LME-appointed warehouses, Chairman He Jinbi said in November. Copper for three-month delivery on the LME traded at $8,131.75 a ton at 2:58 p.m. in Shanghai.
In 2007, Shanghai Waigaoqiao Logistics Center Co., a unit of the developer for the free-trade zone Waigaoqiao, submitted an application to be the LME’s appointed warehouses. It failed after the China Securities Regulatory Commission issued a circular in 2008 prohibiting foreign futures exchanges from having warehouses for commodity deliveries in the country, citing risk management in the midst of the financial crisis. The securities regulator didn’t immediately respond to a request for comment.
The rule didn’t deter the London bourse, which handles more than 80 percent of base metals futures trade. In a letter to shareholders last year, LME Chairman Brian Bender said a takeover by HKEx would help raise the number of clients from mainland China and open warehouses there. HKEx Chief Executive Officer Charles Li said in October he was working to help expand LME warehouses into China.
The Shanghai Futures Exchange, which trades copper and aluminum futures, started to allow delivery of futures to bonded warehouses from 2011 to facilitate physical flows. The bourse is considering opening to foreign investors and setting up overseas warehouses, then-Chairwoman Wang Lihua said in May.
China accounts more than 40 percent of global copper and aluminum consumption. Trading volume of the SHFE totaled 365.33 million lots in 2012, while those on the LME climbed to a record 159.72 million contracts, data from the two exchanges showed.
“The area figures I mentioned refer to those with strengthened foundations for heavy-metal storage,” Ni said. “The total warehouse space is bigger than that, which will lead to a surge this year and next year,” he added.