By Diao Ying
The London Metal Exchange has approved the international arm of Bank of China Ltd as its first Chinese member in its 135 years of existence as the nation becomes the largest consumer of metals traded at the exchange.
BOCI Global Commodities (UK) Ltd, the international arm of China's third-largest lender, was approved for category 2 associate broker clearing membership, the LME said on Tuesday.
The move came as Chinese banks turn their attention to the lucrative commodity trading business generated by the country's vast demand for raw materials.
While China has become the world's major commodity buyer, trading has so far been dominated by foreign investment banks.
"China is the world's largest commodity buyer, but no Chinese bank is doing commodity trading due to their limited capabilities," said Xu Jinlei, managing director of the London subsidiary of Industrial and Commercial Bank of China Ltd, China's largest bank.
Chinese banks have been offering basic services to commodity customers in China, including trade finance and letters of credit, but they have not established capacity such as risk hedging in commodity trading, a more profitable part of the banking business, according to Xu.
"In the long term, Chinese banks need to establish capabilities in this area, such as the technologies for risk management and talent recruitment," said Xu. "And the move by Bank of China to become a member of LME can be seen as part of that effort," he said.
"It is an area with huge potential. The volume is simply too big," he added.
Following Bank of China, ICBC is also considering getting involved in the commodity trading business in London, according to Xu. The bank moved to a new building this week in London, and it has reserved space for commodity futures trading.
The LME, established in 1877 in London, is the world's largest market for trading in non-ferrous metals, with an equivalent of 3.5 billion tons of materials traded at the exchange last year. LME contracts are seen as the global benchmarks for the price of aluminum, copper, zinc and tin.
LME membership has seven categories. There are 12 members under category 1, according to which traders sit at fixed points around a circle and trade in specific five-minute periods. Under category 2, known as associate broker clearing, members do not have access to the ring trading, but they can access the market by phone or electronically. Members in category 2 include HSBC Bank Plc, Goldman Sachs International, and Standard Chartered Bank Plc.