By Eric Onstad
LONDON (Reuters) - Major Chinese broker Nanhua Futures is planning to start trading on the London Metal Exchange in the first half of next year as the market experiences a wave of fresh interest from China.
Nanhua's move comes as Chinese conglomerate Fosun International (HK:0656) holds talks to buy Marex Spectron, one of the biggest brokers on the LME - the world's oldest and biggest trading venue for industrial metals.
Chinese banks and brokers have sought to capitalize on their country's growing role as a top metals producer and consumer, but they have yet to become major players on the LME, industry sources say.
Many have seen their ambitious plans for trading metals like copper and aluminium hit by institutional red tape, cultural clashes and lack of clear strategy, according to the sources, including insiders at some of the Chinese groups' British operations.
Five Chinese institutions are already running trading operations on the LME as clearing members and industry sources said at least four others - besides Nanhua and Fosun - are considering doing so.
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Chinese groups were attracted to the LME after the $2.2 billion takeover of the 141-year-old exchange by Hong Kong Exchanges & Clearing Ltd (HK:0388) in 2012.
Nong Yan, chief executive of Nanhua Financial (UK) Co Ltd, believes the broker can handle the tough business of LME trading. "I want Nanhua UK to be a bridge between East and West, reflecting my experience," she told Reuters in an interview.
Nanhua Futures is one of China's biggest brokerages, with assets of more than 15 billion yuan ($2.2 billion), according to its website, and has already expanded into the United States and Singapore.
Yan was formerly managing director of China Merchant Securities (CMS), one of the Chinese firms in Britain that set up LME trading operations. She has also worked at established LME brokers such as INTL FCStone and Sucden Financial.
After launching LME trading, Nanhua aims to expand to other commodities and financial products, Yan said.
NO CLEAR STRATEGY
Many of the Chinese institutions moving into metals trading in London were driven by the Belt and Road Initiative, a Chinese government push to take a larger role in global trade.
But the push to establish LME operations in some cases lacked a clear strategy, industry sources said.
"The Chinese LME members are not very active and Chinese clients are still doing the vast majority of their business through Western members," said a highly placed industry source, who declined to be identified.
Bank of China International (BOCI), which became the first Chinese member of the LME in 2012, is regarded as the most successful of the five, the sources said.
BOCI, the investment banking arm of state-backed Bank of China (SS:601988) (HK:3988), built up a steady operation by servicing its parent firm's corporate clients, but the scale of its operation is relatively small.
The LME is committed to creating more opportunities for Chinese firms to trade on the exchange, Chief Executive Matthew Chamberlain told Reuters.
"We believe that Chinese demand is under-represented on the LME but that risk management continues to grow in China as more metals companies look to hedge their price risk," he said.
Yan at Nanhua declined to comment on her time at CMS, which she left in May, but other industry sources said it targeted Chinese clients with generous offers of credit lines.
The CMS British unit focused on Chinese clients, but that resulted in an unbalanced portfolio, spurring millions of dollars in margin calls on sharp market moves, another industry source said.
The Chinese parent has now reduced its UK metals activity, the sources said. Turnover last year fell 34 percent to $8.8 million, while operating profit slid 53 percent to $1.2 million, its financial statements showed.
CMS did not respond to a request for comment.
INTERNAL ISSUES
Internal issues were a key stumbling block in the case of ICBC's 2015 tie-up with Standard Bank (J:SBKJ), which combined the world's largest commercial bank, Industrial and Commercial Bank of China (SS:601398), and one of the biggest LME traders.
The following year, ICBC Standard reduced its base metals business to cut costs, sources close to the bank told Reuters at the time.
Suspicion between Chinese executives and Westerners at Standard created a toxic atmosphere, the industry sources said.
ICBC Standard declined to comment.
GF Financial Markets (GFFM), a major Chinese brokerage owned by Shenzhen-listed GF Securities (SZ:000776), is one of only two Chinese Category 1 LME members, which can trade in the exchange's open outcry ring.
A shake-up in GFFM management was spurred by a clash between Chinese and Western managers, which dampened growth of the business, industry sources said.
GFFM Managing Director Edward Shi said in a statement: "Whilst there have been certain management changes since the acquisition, GF Group have always supported GFFM's local management and ... has seen the building of what is now a profitable business."
The other Category 1 LME Chinese member is CCBI Metdist, which has yet to launch expanded operations two years after China Construction Bank (SS:601939) acquired a 75 percent stake in Britain's Metdist, the LME's smallest floor trader.
It posted a loss of $6.7 million in the financial year to Aug. 31 last year, which it said was due to investment in expansion, after a loss of $2.6 million the year before.