Arthur Fan
CEO Marex Asia-Pacific
This article first appeared in FOW. Click here to read it there.
Asia is the engine of global demand for commodities, especially metals. Yet, even as the region’s economic influence grows, commodity price benchmarks, trading platforms and financial products remain largely driven from outside Asia. So, what’s missing?
With China by far the world’s biggest consumer of base metals, it would be natural for more pricing benchmarks and trading to be driven from Hong Kong, its international financial centre. There’s a strong argument that more global investors and metals users should be coming to China to trade, rather than Chinese users and investors transacting overseas.
But becoming a global centre for commodities trading depends on more than buying power. To become a focal point for the exchange of metals and other industrial materials, Hong Kong needs solid policy action, new investment in storage capabilities, wider accessibility for investors and, perhaps most vitally, more digital innovation.
The golden opportunity
Asia is the epicentre of demand for most commodities. In the first six months of 2024, for example, the trading volume of commodities derivatives in China’s onshore futures exchanges amounted to about 60% of the entire world’s total. The US, in second place, accounted for about 15%.
Gold is a key example. The precious metal has once again become one of the most sought-after assets on earth, making history in 2024 as demand pushed past $100bn (£83bn) of value for the first time.[1]
China and India alone account for over 20% of global gold import volumes, with China the fastest-growing importer by US dollar-denominated volume.[2] Among central banks, India’s has been the second-biggest net purchaser of gold.[3]
Gold’s meteoric rise reflects trends that are reshaping commodity demand more broadly. China’s recent stimulus announcements could push up demand for base metals even more; its industrial activity spurs price action for materials such as zinc, copper and aluminium, which are key inputs for modern electronics and solar arrays.
The rest of Asia needs these materials too so a Hong Kong hub could hold the middle ground between China’s economy and those of its neighbours.
With China by far the world’s biggest consumer of base metals, it would be natural for more pricing benchmarks and trading to be driven from Hong Kong, its international financial centre.Arthur Fan CEO Marex Asia-Pacific
How to build it
Trading hubs often emerge near commodity sources. The Chicago Board of Trade (CBOT) was the US hub for agriculture before it transitioned to include other commodities later on. It was the same with North Sea oil and the Intercontinental Exchange (ICE) in London, originally the International Petroleum Exchange, which sets the benchmark for Light Brent crude.
But London also sets the benchmark for gold and that is a story of storage, not source.
London’s vaults hold over 8,700 tonnes of gold and another 26,600 tonnes of silver[4]. The logistical systems that have grown up around those capacities, to transfer ownership and track exchange-traded fund (ETF) activity, are highly sophisticated.
It is no wonder then that John Lee, chief executive of the Hong Kong Special Administrative Region, highlighted gold storage in his October policy address. Or that the Airport Authority is expanding its gold vault capacity from 150 to 1,000 tonnes.[5] Or that a new storage facility went up in Singapore in 2024 that can hold up to 500 tonnes of gold and another 10,000 of silver.[6]
But even combined, these totals are a long way from London’s storage volumes. Expanded metals warehousing, accrediting and logistics will be key to building a global metals trading hub in Asia. It may start with gold, but the same requirements apply for other base metals.
Could Hong Kong take up this opportunity? The London Metal Exchange (LME) is reportedly considering making the city its newest warehousing location, with speculation that an announcement is imminent. But there is more to the story here than storage.
Liquidity
A regional metals hub will also need the financial infrastructure that enables institutional and individual investors to access commodities and allow industrial users to hedge risks. This means going further than the scaled-down versions of LME contracts that have been floated in Hong Kong so far.
Asia needs localised solutions rather than versions of what’s available elsewhere.
Expanding the range and depth of commodities-based ETFs and derivatives could boost liquidity for the underlying products in Hong Kong too. According to the World Gold Council, almost 20% of the gold in London’s vaults is allocated to gold-backed ETFs. Hong Kong will need to rival that integration to make a play for hub status, which makes digitalisation pivotal.
Technologies like blockchain and smart contracts can increase trading efficiency, widen market access and deepen cross-border and financial integration. They also enable fractional-asset ownership and 24-hour markets. In November, US regulators approved a 24-hour stock exchange,[7] so leveraging digitalisation for commodities is now a matter of ‘how’, not ‘if.’
Digital platforms also solve issues around unified standards. A lack of quality benchmarks across Asia has created regional price variability. An international trading hub should be able to provide widely-accepted pricing.
While digitalisation can carry some of that weight, a dedicated regulatory regime must carry the rest. Other asset classes, like digital assets, have specific regulations in Hong Kong, so why not metals? Singapore has focused regulations for commodities and its share of global energy and metals trade is close to 20%[8].
Singapore is competing with Hong Kong on digitalisation too, after its Monetary Authority announced plans to commercialise physical-asset tokenisation in November.[9] In Hong Kong, the idea of using blockchain has only just been floated in a policy address.
Hong Kong, with its proximity to mainland China and mature financial markets has many of the strengths it needs to become a global metals hub for the country and the broader region, setting benchmarks in an internationally-accessible market. But gaps in infrastructure, accessibility, and innovation remain. It will be critical for the city to move swiftly from ideas to implementation in order to capture this opportunity.
2 https://oec.world/en/profile/hs/gold
3 https://www.gold.org/goldhub/gold-focus/2024/10/central-banks-report-modest-demand-gold-august
4 https://www.lbma.org.uk/prices-and-data/london-vault-data
5 https://www.thestandard.com.hk/section-news/section/2/267097/Airport-to-expand-gold-vault
7 https://www.ft.com/content/fc41c6fe-2a34-48fd-ac94-68bd08c5bdff
