Kaohsiung Port's Certification as an LME-Certified Delivery Point: What Will it Mean?

Following over a year and a half of effort, Kaohsiung Port, the largest commercial harbor under the administration of the government-owned Taiwan International Port Corp. (TIPC), was formally approved by the London Metal Exchange (LME) on June 17 this year to become one of its delivery locations.

Kaohsiung, which serves 344 intercontinental routes to 53 different countries and handles about 10 million twenty-foot-equivalent units of containers per year, is the ninth LME-certificated delivery port in Asia. The others are South Korea's Gwangyang, Incheon, and Busan; Japan's Nagoya and Yokohama; Singapore's Klang; and Malaysia's Johor. Kaohsiung is the first LME delivery port in the Greater China area.

Kaohsiung's status as an LME delivery location can help Taiwan boost its economic presence among non-governmental organizations and better link with the rest of the world.

To support trading in futures and options contracts on LME's platforms, and provide a mechanism for physical delivery, warehouses and storage facilities that must be certificated by LME are being constructed in Kaohsiung Port.

LME is one of the world's major exchanges for non-ferrous metals and has a vast network of certificated warehouses all over the world. It accounts for more than 80% of the global non-ferrous on-exchange business, equal to US$14.5 trillion, or 3.7 billion tonnes and 160 million lots, on its markets in 2012.

The Metal Industries Research and Development Centre (MIRDC), a metal industry and market researcher in Taiwan, provided a look into the effects on the island's basic metal industry of Kaohsiung Port operation as an LEM delivery point.

Imports of LME Metals

The MIRDC reports that Kaohsiung Port is currently approved by LME to store and handle physical delivery covered by futures contracts against seven kinds of non-ferrous metal: aluminum, aluminum alloy, copper, lead, nickel, zinc, and tin. The port is now applying for LME's approval to handle the storage and delivery of molybdenum, cobalt, and steel billets.

Taiwan imports most of the seven approved metals that it consumes, but the imports have steadily declined over the years in terms of both value and volume.

MIRDC notes that during 2008-2012, cumulative imports of the seven metals totaled 6.42 million tons, with 37.4% being copper, 23.5% aluminum, 15.9% zinc, and 15% aluminum alloy. In 2012 alone imports reached 1.29 million tons, including some 430,000 tons of copper and 340,000 tons of aluminum, compared to 1.371 million tons a year earlier.

The 2008-2012 imports had a value of NT$951.648 billion, with copper making up 60.1% of the total as the most needed material followed by aluminum and aluminum alloy.

Last year's imports dropped 18.7% to only NT$167.659 billion in value, compared to NT$206.11 billion in 2011. Of the total, NT$103.3 billion was generated by copper, NT$21.8 billion by aluminum, and NT$14.354 billion by aluminum alloy, compared to NT$122.149 billion, NT$26.206 billion, and NT$17.103 billion a year earlier. The value of nickel imports in 2012 plummeted 50.1%, to just N$4.994 billion.

MIRDC explains that the declines resulted partly from the maturity of the domestic market and partly from the fact that downstream manufacturers generally avoided building too much of an inventory because of cost considerations, especially in the wake of underselling competition by Chinese rivals.

Benefits

After Kaohsiung formally becomes a part of the LME physical delivery system, however, Taiwan's imports of these basic metals which can be delivered from the port to fulfill futures contracts conducted on LME platforms are expected to surge.

Moreover, Kaohsiung Port's prospect will shine even brighter when China, the world's largest consumer and supplier of non-ferrous metals, allows exports of copper, zinc, and so forth in the near future, says the MIRDC; since China has no LME-approved ports, Kaohsiung Port will be able to better connect with China's major commercial ports to boost its container throughput.

For instance, MIRDC says, there are a large number of Chinese traders who buy in stainless steel futures exchanges, and Kaohsiung Port will likely attract more foreign investment from warehouse and storage facilities operators, financial service providers, and basic metal suppliers, as well as global futures commission merchants, because in addition to being an LME-approved delivery point it is also directly linked to China's commercial ports and so can help enhance logistics efficiency, shorten physical delivery, cut transportation costs, and hedge the risk of rising and falling metal prices in futures trading.

Local manufacturers, however, seem uninterested in Kaohsiung Port's LME-approved business at the present time, despite the fact that it should make material restocking easier and speedier for them.

MIRDC indicates that local metal product manufacturers currently use two different stocking methods, depending on quantity—small quantities are restocked through warehouse operators, while mass quantities are restocked by signing years-long contracts with foreign suppliers. This means that most local downstream manufacturers will benefit only moderately from LME functions at Kaohsiung Port in the short term, until their current supply contracts expire.

High charges for the storage of materials in LME-approved warehousing facilities, and the long lead time entailed, are negative factors that discourage local small and medium-sized manufacturers from restocking through LME functions, which they think will force them to bear additional costs transferred from warehouse operators and warrant holders, states MIRDC. The center adds that competitive prices, speedy delivery, and high quality are the main concerns of Taiwanese basic metal buyers and traditional manufacturers, especially those for whom materials purchases account for up to 70% of total costs.

Two Taiwanese firms from different sectors, however, are upbeat about the benefits of Kaohsiung Port's gaining LME approval as a delivery location, and both have taken action to make the most of it.

One is Thye Ming Industrial Co., Ltd., a materials exporter of Taiwan's only LME-registered brand of lead ingots, which has decided to use Kaohsiung Port as its export logistics hub. The firm emphasizes that once Kaohsiung Port formally kicks off its LME-approved business, the firm's goods bound for overseas markets to fulfill LME futures contracts can be shipped at a lower cost. The firm currently has to pay US$25 per ton for follow-up handling on the shipment of cargo from Kaohsiung to Singapore, but the cost will drop to only US$5 when physical delivery can be handled in Kaohsiung.

The other is Lota International Co., Ltd., one of the world's largest suppliers of faucets, whose production base in Xiamen has a daily output of about 100,000 units. Every year the firm consumes about 200,000 tons of copper, zinc, and nickel, most of which is purchased through LME platforms, and Kaohsiung Port's LME delivery point status will help it secure a speedy and stable supply of raw materials.

Foreign warehouse operators have also shown an intense interest in operating LME-related businesses in Kaohsiung Port, and are actively seeking partnerships with local logistics and freight forwarding companies.

Among the interested foreign firms, H&M Metal Warehousing from Singapore, C. Steinweg Warehousing from the Netherlands, and Pacorini Metals from Switzerland have been approved by LME to store the seven metals in their warehouses and storage facilities in Kaohsiung Port starting in November. Their local partners include Lien Hai Terminal & Stevedoring Co., NYK Terminal (Taiwan) Inc., and Formosa Logistics Corp.

Conclusion

MIRDC notes that overall non-ferrous metal inventory built up by LME in its approved warehouses and storage facilities worldwide surged sharply, from 1.5 million tons in 2008 to some 6 million tons in 2010, in a response to the takeoff of Asian markets, especially China. This increase has prompted the exchange to aggressively expand its delivery points to new harbors—including Kaohsiung--during the past few years.

MIRDC concludes that whatever its effects on local industries related to non-ferrous metal businesses, LME”s approval of Kaohsiung as its delivery point will help pave the way for the harbor to develop into one of world's major logistics centers and strengthen its global competitiveness in the future.

 

Taiwan's Annual Import Volume of The 7 LME Metals Approved for Kaohsiung Port Unit: Metric Ton
Year	2008	2009	2010	2011	2012	Total
Copper	585,012	498,379	535,531	460,738	433,519	2,513,179
Aluminum	266,992	275,717	354,927	346,114	337,411	1,581,161
Zinc	221,581	191,583	234,007	224,489	194,706	1,066,366
Aluminum Alloy	236,641	150,566	185,317	217,799	215,415	1,005,733
Lead	54,054	94,794	69,520	97,030	85,982	401,380
Nickel	22,052	27,117	22,050	14,975	8,982	95,176
Tin	13,049	10,787	12,462	10,081	9,657	56,035
Total	1,399,381	1,248,941	1,413,815	1,371,226	1,285,672	6,719,035

Source: Metal Industries Research & Development Centre