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Hong Kong Exchange Defends $2.2 Billion Price for LME

Hong Kong Exchanges and Clearing (HKex) has defended its purchase price of $2.18 billion for the London Metal Exchange, after some analysts voiced concerns about the amount it was paying.

Shares in HKEx fell 2.7 percent in early trade on Monday after many analysts said its LME deal was expensive, underperforming the benchmark Hang Seng Index's 1.5 percent gain.

Hong Kong Stock Exchange
Peter Parks | AFP | Getty Images
Hong Kong Stock Exchange

HKEx CEO Charles Li told CNBC’s Bernie Lo on Friday he believes the company was paying the “market price” and that people were basing their valuations on the wrong numbers.

“This is a very competitively managed auction process, participated by all the global leaders in the commodity exchange space. So I think the price coming out of that sort of process, I trust, is the market price,” Li said. “The reason it does look pricey is people are trying to use apple and oranges.”

The LME is now a member-owned mutualized exchange and its profit was constrained by its ownership structure, Li said. After the takeover, the HKEx will turn the LME into a commercial enterprise, Li added.

The price that the HKEx is paying for the LME translates to a multiple of 180 times last year’s earnings and 22 times the last traded share price before the announcement, far higher than the one billion pounds that the CEO of LME told CNBC the trading platform could get.

Li said the most important factor to consider is the fact that the HKex will bring LME to Asia, particularly to China.

Li said the combined HKex and LME will seek a “collaborative relationship” with the Shanghai Futures Exchange rather than compete with the mainland exchange.

While the London Metal Exchange is very rooted in the physical markets, the Shanghai Futures Exchange is very focused on trading, Li told CNBC on Friday. This means that the biggest metals firms in China are not able to manage risks in their businesses effectively, he added.

“The current physical market of copper and alumina and base metals, just doesn’t work for the Chinese players, Jiangxi Copperand (China) Minmetals,” he said, referring to China’s biggest metal producer and one of the world’s largest metal trading firms, respectively. “They cannot effectively hedge and risk-manage their businesses because of the divergence of the LME market and Shanghai Futures Market.”

“We are really talking about a collaborative relationship,” Li said. “What we are trying to do is to try to create a platform where the people could not do what they need to do in Shanghai or LME and we are able to find a way to break that barrier, whether it’s on the physical delivery side, whether it’s on the trading side.”

The Shanghai Futures Exchange trades futures contracts in copper, aluminum, zinc, natural rubber, fuel oil, silver and gold while the London Metal Exchange offers hedging via futures and options, backed by the physical delivery of metals.

Li hopes that this acquisition will bring more trading by China, the world’s largest metals consumer to the LME. Currently, 40 percent of copper demand is from China but only 25 percent of this demand is routed through the LME.

—By CNBC’s Jean Chua.