Why Rusal's Hong Kong IPO Hurts the LSEMark Leftly
It's all eyes to the East at the London Stock Exchange this week as the great City institution comes under threat from an emerging – and roaring – dragon. For decades, the LSE has been one of the dominant bourses in the world, competing against those in New York and Frankfurt. In particular, it is the financial centre of the mining world.
Although little production takes place in this part of the globe, the big North American, Australian and African miners have always looked to London because of factors relating to access to capital, language and time zones. But the decision by UC Rusal, the Russian aluminium giant run by billionaire Oleg Deripaska, to list in Hong Kong threatens to undermine that status.
Rusal executives were in London last weekend, talking to major sector funds ahead of the formal listing launch later this month. They are spelling out why Rusal plumped for Hong Kong and pointing out that dozens of central and eastern European and Eurasian firms are set to follow the miner. Hong Kong, they will explain, is the natural home of mining and industrial companies.
"A year from now, it won't be extraordinary for a Russian company to list in Asia," argues Artem Volynets, the director of corporate strategy at Rusal. "Hong Kong will give Russian companies access to some of the fastest- growing capital markets in the world."
Listing in Hong Kong makes geographic sense – 80 per cent of Rusal's smelters are just north of China. As Russia is one of Earth's great commodities exporters and China is the biggest consumer on the planet, the move also makes logical trading sense.
Fascinated by the advantages of Hong Kong, Mr Volynets says he has fielded calls from Russian and Kazakh executives keen on following Rusal.
Peter Hambro, the chairman at the London-listed miner Petropavlovsk (PPLKY), was reported as saying just last week that the firm would "think harder" about a secondary listing in Hong Kong as a result of Rusal. A delegation of company directors and government officials from Kazakhstan is understood to have scouted the Hong Kong exchange last summer.
One leading law firm is working on 23 listings in Hong Kong, while Schramm Holding, a manufacturer and supplier of industrial coatings, became the first German company to go public on the exchange last month.
Other reasons London is suffering against Hong Kong are economic and political. "People are concerned about sterling's weakness and potential hung parliaments in London in the short-term," says one London-based investment banker. A mining banker says that "the real blue-chip, North American corporates" will stick with London, due to the aforementioned advantages. But he argues that emerging markets, such as Russia, which have many more mature companies that have not previously accessed public markets, will find Hong Kong and its proximity to China attractive.
Hong Kong has also become more effective in its marketing. "The Hong Kong exchange is targeting companies from wider areas," says Jeremy Hunt, the head of the Hong Kong corporate division at lawyer Allen & Overy.
A further weakness is that many London-based funds really only want to take part in flotations if they are for firms with established cash flow. As a result, firms that need to access the market to get money to develop projects, such as mines, are being wooed by more supportive overseas exchanges. For example, the Ukraine-based Lubel Coal Company has long targeted a listing on AIM, the junior stock exchange. However, it needs to raise $150m to $200m in funds towards its $700m project start-up costs this year. With returns maybe five years away, Lubel would struggle to raise the cash in London.
David Swan, Lubel's finance director, is being wooed by the idea of both Warsaw and Hong Kong. "I have the view that London will not happen for us this year," he says. "Certainly, an IPO [listing] is our biggest challenge."
Already, mining bankers at the great financial institutions are spending more and more time away from London. One, involved in several recent flotations, half-jokes about his wife never seeing him, due to his always being in Eastern Europe and Asia. If he wants to continue winning the big work, he will have to spend even more of his time living out of a suitcase in Russia, Hong Kong and mainland China.