Traders work at the London Metal Exchange. A new consultation, due to be launched next month, will cover both logistical and legal reviews of the LME’s warehousing network as well as the rule-changes required to launch physical premium contracts.
Another LME Week, the annual pilgrimage of the global metals industry to London, has come and gone.
It is a time-honoured tradition, and on the surface at least this one was no different from those of previous years.
The London Metal Exchange (LME) Seminar on Monday morning, the official opening ceremony, was as packed as ever. The champagne flowed as freely as ever at the cocktail parties hosted by Triland Metals and Mitsui Bussan Commodities at the Dorchester hotel that evening.
On Tuesday, the massed ranks of tuxedoed traders, producers and consumers descended on the Grosvenor House hotel for the LME black-tie dinner to engage in the ritual sport of betting on the length of the guest speaker’s speech.
These are merely the most visible of the many private parties, side meetings and seminars that constitute the annual dialogue of the great and good in the industrial metals supply chain.
And yet, there was something different about this one.
It wasn’t just that the cocktail circuit was lighter this year as brokers and, before readers collectively reach for their e-mails, my own employer reined in the largesse of times past.
After all, it’s been a turbulent time in the LME brokerage business. Barclays Capital, Credit Suisse and Deutsche Bank have all gone. JPMorgan has significantly reduced its footprint, selling part of its business to Mercuria.
This mass departure has been driven by the current dynamic of post-crisis regulation and risk reduction, but it fits into a longer-running cycle of investment banks’ revolving-door participation in LME trading.
Standard Bank London’s ongoing absorption into China’s ICBC is perhaps a more telling manifestation of deeper structural changes in the world of metals trading.
Or, to quote Ken Hoffman, global head of metals and mining at Bloomberg Intelligence, speaking at its “East Meets West” seminar, we may be seeing the “beginning of the end of trading metals in the West as we know it”.
Hoffman’s contention is that on current trends “Asia may surpass the West in metals trading volume by 2020, if not sooner”.
Fittingly, therefore, this was the year that Hong Kong Exchanges and Clearing (HKEx), which bought the LME back in 2012, really laid out its store in terms of tapping into the booming liquidity of the Chinese metals markets.
Spearheading its strategy will be the launch in December of three mini contracts for copper, aluminium and zInc
It’s not the first time such contracts, called “mini” because with a lot size of 5 tonnes they are smaller than the 25 tonne contracts traded on the LME, have been tried. Both the LME itself and then the Singapore Exchange failed to get any long-lasting traction.
But HKEx has a unique advantage in the form of its 34 members from mainland China, a natural distribution channel for the high net wealth individuals who, according to Bonnie Liu, senior vice president of Asia Commodities at the exchange, account for around 70% of trading on China’s own exchanges.
Moreover, these contracts will be denominated in (offshore) renminbi (RMB) and cleared in Hong Kong, removing in part the previous barriers to Chinese investor participation.
It’s no coincidence that they mirror the highly liquid base metal contracts traded on the Shanghai Futures Exchange.
It’s all part and parcel of HKEx’s broader goal of replicating its pending Hong Kong-Shanghai stock-connect model in the commodities space, according to Charles Li, HKEx chief executive.
“You have to create something in Asia that China can trade,” he said at the LME seminar. If HKEx can successfully leverage the LME pricing franchise into China, Chinese exchanges might conceivably “bring their contracts to Hong Kong”.
HKEx also announced last week a memorandum of understanding with China Merchants Group on “exploring initiatives such as LME warehousing in Asia and the development of new RMB-denominated products”.
Don’t hold your breath, though, on the LME opening warehouses in mainland China any time soon.
Li was cautious in his comments, noting that it would require a change in Chinese regulator CSRC’s rule-book. “That battle has huge machine guns and bunkers that are very hard for you to take,” he warned, drawing from his apparently inexhaustible book of military metaphors.
“Instead, we are trying to develop a broader strategy of collaboration and partnership and fight the war on a broader field. Hopefully, when we win the war (warehousing) will be part of the treaty.”
The trick for HKEx will be to develop products that can connect with China without losing the unique features of the LME trading model that have made it the global pricing benchmark for industrial metals.
There is still simmering anger among the LME brokerage community about the scale of the increases in trading fees due to come into effect at the start of next year.
And one of the longest rounds of applause at the LME Dinner came when guest speaker Apurv Bagri, chief executive at ring-dealing member Metdist Trading, warned that reshaping the market into “an American-style exchange” would erode the LME’s unique connectivity with its industrial user base.
However, if the LME’s existing trading model is to be preserved, its good delivery function must first be fixed.
With the court-room challenge to the exchange’s previous warehousing consultation now dismissed, expect an avalanche of second-phase reforms.
A new consultation, due to be launched next month, will cover both logistical and legal reviews of the LME’s warehousing network as well as the rule-changes required to launch physical premium contracts.
Then will come a drive into the universe of ferrous metals trading, with Matt Chamberlain, head of business development, suggesting an initial focus on new steel scrap and rebar contracts. The list of “Phase 2” products on his slide runs the gamut of the steel supply chain; iron ore, coking coal, stainless steel, hot-rolled coil and cold-rolled coil.
All, however, will be “American-style” cash-settled products, albeit co-existing with the LME’s current but moribund physically settled steel billet contract.
Compounding the downbeat mood among parts of the LME “Street” is the general sense that the only thing that’s not going to change much over the next year are metal prices.
Most seem braced for more of the same tough trading conditions that characterised the last 12 months.
Macquarie Bank’s survey of the 400 plus participants at its Base Metals Summit on Monday underlined the generally flat sentiment permeating this year’s LME Week.
The audience’s weighted-average expectation for cash copper in one year’s time was $6,663 per tonne, only marginally different from Monday’s official LME price of $6,615.
The prognosis for aluminium wasn’t much better at $1,997 per tonne, compared with Monday’s official price of $1,955.
Nickel remains the collective bull favourite, despite or maybe because of the collapse of this year’s early rally. The Macquarie audience’s average view was for a run-up to $19,859 per tonne from Monday’s $15,315.
Nickel was picked as the metal to watch by both Macquarie analyst Jim Lennon and by Paul Gait, analyst at Sanford C Bernstein, at the Bloomberg seminar.
Robin Bhar, analyst at Societe Generale, went for lead and tin.
Gayle Berry of Jefferies went for spreads in general rather than a specific metal.
Everyone last week was talking about zinc, albeit with widely diverging views about the much-heralded and long-anticipated market deficit.
It was a dichotomy nicely captured in the title of the paper presented at the LME Seminar by Duncan Hobbs, analyst at Noble Group: “Zinc market outlook - balance of material vs balance of opinion”.
As for aluminium, it was typical of this enigmatic market that the two speakers at the LME Seminar, Citi’s David Wilson and Natixis’ Nic Brown, were at odds over whether the global market will be in surplus or deficit next year.
If you’re confused, maybe try seeing things a little differently.
One of the more thought-provoking presentations last week came from Colin Pratt, managing consultant at CRU Group, at CRU’s breakfast meeting.
Under the title “Two and a half cheers for resource nationalism”,
Pratt noted that Indonesia’s ban on raw material exports, resource nationalism writ large, had transformed the two previous dogs of the LME complex, aluminium and nickel, into this year’s out-performers.
Was it coincidence, he asked, that this year’s under-performers, copper and iron ore, are heavily weighted by production volumes to “safe” investment countries?
A new metric for the base metals? Time will tell.
But it’s a new age for the LME and, if Hoffman is right, it may be the start of a new era for global metals trading.
*Andy Home is a Reuters columnist. The opinions expressed are his own.
