UNDER large chandeliers in London’s ornate Gibson Hall this month, China’s largest bank celebrated its $690m purchase of a 60pc stake in Standard Bank’s global markets unit.

The acquisition will help Industrial and Commercial Bank of China offer a full range of commodity services to its clients, some of China’s largest natural resources companies, as it moves to compete with the likes of Citigroup and Goldman Sachs.

ICBC’s purchase is the latest foray by a Chinese entity into London’s commodities market, seizing on an opportunity to service Chinese clients, which produce and consume the bulk of the world’s resources, as western banks withdraw from the sector.

The likes of ICBC are filling a gap left by western groups’ exit from physical trading

China consumes more than 40pc of most of the world’s metals, is the largest oil importer and is the foremost producer of many commodities. Yet while its banks have financed billions in resource deals from Africa to Latin America in the past decade, they have lagged behind western institutions in providing access to commodity finance, hedging and related services.

After Chinalco acquired the Toromocho copper mine in Peru, the state-owned Export-Import Bank of China provided a $2bn 15-year loan. ICBC set up an office in the country to serve Chinese clients there. Yet it was western banks that helped Chinalco hedge its exposure to fluctuating copper prices, according to a person familiar with the matter.

“A lot of their clients have exposure to commodities, so it’s a natural progression because a lot of these commodities are still priced on overseas exchanges,” says Jeremy East, global head of metals trading at Standard Chartered in Hong Kong. “If you are importing copper from Chile, you are buying that according to the London Metal Exchange so you would be looking to hedge on the LME.”

China Merchants Securities, a unit of one of the country’s largest securities companies, became a member of the LME and started trading last month. It joins Chinese entities GF Financial Markets and Bank of China in gaining access to the 138-year-old exchange, which was bought by Hong Kong Exchanges and Clearing in 2012.

“The business strategy of China Merchants Securities, UK, is to start with providing commodities risk management platforms and services to meet demand from China to hedge the global natural resources price risks,” says Stephen Kan, chief executive of the London unit.

Chinese banks and securities companies have been encouraged to expand overseas in part to help the renminbi become a global currency. The LME has submitted a plan to UK authorities to allow the acceptance of renminbi collateral and is working with China Construction Bank on investment options for its clearing house, according to Garry Jones, the exchange’s head.

Western banks have steadily exited physical commodities trading amid growing regulatory scrutiny. Last year Barclays said it would give up most of its metals trading, and JPMorgan agreed to sell its physical commodities business to Mercuria, a Swiss commodities trading group. Morgan Stanley is seeking to sell its oil trading assets.

Western banks have booked losses stemming from an alleged fraud that came to light last year involving metal held in two Chinese ports. Citi faces potential losses of $270m, while Standard Bank made a capital injection of $300m into its UK unit last month to make up for losses from exposure to aluminium held in the ports in question.

“[Chinese banks] have a strategic advantage because a lot of western banks have run screaming from China having been completely burnt,” says a veteran metals broker.

ICBC was particularly interested in Standard Bank’s physical commodities business, says a person familiar with the matter. Having a physical commodities business, which involves financing and shipping metals around the world, gives banks an insight into the market, allowing them to manage risk better.

The Chinese banks still face competition from established players that remain. Goldman had won more commodities business as its rivals exited, chief financial officer Harvey Schwartz said last month.

Banks from other emerging markets have expanded in the UK. Brazil’s BTG Pactual is doing an increased amount of trading on the LME.

It will take time for the entrants to master the market, analysts say. In London the Chinese entities have hired experienced traders. GF Financial has hired Martin Woodall, former head of trading at Natixis. And Tim Pateman, who used to trade at Mitsubishi UFJ Securities and RBS Sempra Commodities, has been hired by China Merchants Securities.

The latter group plans to attract European clients, not just Chinese ones, according to a person familiar with its thinking. “If you’ve got lots of Chinese clients short nickel, you’d like someone on the other side of your client book,” the person says.

Published in Dawn, Economic & Business, February 16th, 2015

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