LME WEEK 2016: As the parties begin, is the glass half-full or half-empty?

It is the time of year, albeit slightly later than usual, when anyone who is anybody in the metals space hotfoots it to London for the annual shindig that is LME Dinner Week.

These days, it is not the standout centrepiece it used to be – there is an LME Week in Asia in the summer while April and December see CESCO gatherings in Chile and China.

Even so, the October gathering is still guaranteed to bring thousands flocking to London. Aside from the networking, the annual contract negotiations and checking out the sentiment-meter, it is “State of the Union” week for the LME. And the keynote speaker at the Dinner on Tuesday November 1 is none other than Michael (now Lord) Farmer.

It’s safe to say he’ll not lack topics to talk about – the exchange has had a challenging twelve months. It’s also safe to say that there have been plenty of murmurings of discontent from users about costs, fees, warehousing, underperforming new contracts, wider access to the market and even the LME’s new premises.

It is not the LME’s fault that a problem in the new building housing its HQ and trading floor resulted in ring-traders having to decamp to the disaster recovery site for much of the summer. But it added to the grumble factors, especially because floor volumes were below par, even for the time of year.

That’s unfortunate – but the rest of the LME’s slate over the last twelve months cannot be put down to bad luck. First, the aluminium premium hedging contracts launched at the back end of last year have been consistent with zero trading, zero open interest and zero “queue-free” stocks being warranted – and, apart from the first few days, zero price-quoting by the boys on the floor.

Maybe these are the wrong contracts at the wrong time to solve a problem (sky-high premiums and long warehouse removal queues) that was going away anyway, while the CME has aluminium premium contracts that are simpler in construction and easier to understand – these are being traded and traction is building.

Longer-established LME contracts have also virtually expired – steel billet (again) and molybdenum have zeroes where inventories, open interest and trading volumes are concerned. In the physical market, molybdenum prices virtually doubled in the first six months of this year and then retraced by around 20%. If that type of volatility can’t enliven futures, nothing much will.

But it is not all negative on the contract front. At the same time that premium-hedging contracts were introduced, two new steel markets were open for business as well: steel scrap and steel rebar, which have undramatically taken hold, particularly scrap. Perhaps this is because they are cash-settled on an easy-to-understand formula and very much screen-traded.

Aside from that minor steel success, the LME has suffered falling volumes at a time when other competitor exchanges are reporting increased turnovers. That hurts if you are the world’s largest non-ferrous metals exchange and it can’t simply be blamed on the state of the global economy or the underlying physical metals sector. Certainly, the level of contract fees does not help, even though it was inevitable that charges would rise after Hong Kong Exchange & Clearings (HKEX) bought the LME.

On that last note, perhaps it is a case of “the law of unintended consequences” affecting the short-dated carry scene. Why would a customer or a broker pay every day to do cash/one day when re-structuring the trade to cash/one week or cash/two weeks will cost less (and reduce the reported turnover). Again, in the spirit of fairness, it must be acknowledged that the LME has listened and devised some fee reductions – 44% on the short-dated trades, it says. The jury is out right now on how that unfolds but the turnover trend needs to change and be seen to change, probably over the next six months.

Warehousing is another front that the LME has been fighting on for some considerable time, and, like the Schleswig-Holstein question, seems to be have going on for so long now that very few people fully grasp the rationale behind all the LME proposed reforms, queue-reduction measures, charge-capping and rent-freezing humdingers.

What is clear is that it has taken up an enormous amount of time and energy at the LME and in the warehousing, banking and broking areas. Some finality is in sight; closure is needed here – certainly before the legal eagles start to fly.

Then there are the implications of the LME in the latter part of last year opening up access on the electronic platform to newer participants as well as various incentive programmes. This appeals more to the algorithmic fraternity than the ‘traditional’ market-user and is not going down well with the more conservative elements of the industry.

There is a laudable and logical objective here for the LME – attracting the type of systems-based business that will add value to the liquidity pool as opposed to the more outright HFT element making hay. But hitting the Goldilocks sweet-spot between what the LME feels is desirable and what it deems is undesirable is not easy.

All told, there are many reasons not to be cheerful in Park Lane this year – and that’s even before taking into account the downbeat economic and market outlook, coupled with Brexit, that the brokers and industry are enduring. So there is plenty for the luminaries to ponder over when the speeches start at the Tuesday dinner. And while the chairman and ceo will be drinking from glasses half full when they stand up, Lord Farmer may well see things in a different light.

He has the LME and metals industry imprinted in his business DNA. He is an ex-floor trader from the Ring’s glory days in the 1970s, as well as a big player with MG and its various incarnations down the years. What he has to say about the market, the exchange in particular and where it is going, will carry clout. More than a few people may well be wriggling uncomfortably in their seats that night.

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