The LME’s annual dinner week is usually a time when the global base metals community gathers to cast the runes for the year ahead.
For most of the past decade, early October has been a time of healthy conditions for industry and positive price prospects. But this year is different.
While the industry’s movers and shakers, big market names and a variety of hangers-on will all be here for a week of seminars, meetings and glad-handing, centred on one of London’s biggest black-tie dinners at a Park Lane hotel, the backdrop is such that 2012’s gathering may be radically different.
On the price side, metals have been in retreat since late summer, with commodities caught up in a maelstrom of asset sales while the world grapples with a growing debt mountain and the threat of a double-dip recession.
“LME Week this year will resemble that of 2008 [after the collapse of Lehman Brothers] in that confidence is battered, markets are bruised and uncertainties are vast,” Robin Bhar of Credit Agricole said. “It’s not as bad now as it was then – there’s more cash and less debt – but it’s easy to see how things could go really wrong.”
And the exchange itself, for more than a century an independent market, is being courted by at least 10 interested parties in the financial exchange arena – by October next year, 55 Leadenhall Street may well be under new ownership and have switched to a more commercial model.
“Will it be CME Week, SGX Week, ICE Week when we meet all again next year? I hope not – LME Week is a nice tradition. It would be a shame to end it,” a trader at a large merchant company said.
But change can be a good thing, another trade source, who sits on one of the LME’s numerous committees, argued.
“The LME is a great business – trading and warehousing operations are very buoyant,” he said. “I like changes – I think the LME could do so much better with a commercial hat on or, rather, the commercial freedom to expand.”
If the price tag of $1 billion initially reported in the press surprised some metals industry participants who still thought of ‘their’ LME as a giant in their world but a dwarf in the global derivatives arena, the final number may raise even more eyebrows.
“I think we could get a couple of billions, maybe more,” an LME shareholder said. “It’s not just trading volumes and revenues you have to look at. The true value of the LME relies upon the benchmark system [the use of the LME as a global pricing reference], the warehousing network and clearing.”
It is the LME’s decision to examine a move into self-clearing that caught the attention of other exchanges, another shareholder told FastMarkets.
Clearing expert Trevor Spanner, who joins the LME in November, will head up the LME project, which will carry on regardless of the sale process, CEO Martin Abbott said in an interview.
“He will get to work on validating the studies that we have done and whether we go to the board and say we want to change the way we clear or build our own clearing house,” Abbott said. “We are not looking at anything this year.”
The LME’s record trading volumes and unchallenged dominance of the futures and options markets for non-ferrous metals must also look appealing.
Turnover is expected to hit a new record level close to 150 million lots in the whole of 2011, up from 120.3 million last year, Abbott said.
“Implicit in the assumption that there is a transaction is that there is a switch to a commercial model,” he said, judging a deal – if any – unlikely before April of next year.
What is certain is that the battle for the control of the world’s largest non-ferrous market will be the hot topic next week.
GLUM TIME FOR METAL PRICES?
But while news of a possible sale may bring some cheer, the tone will be gloomier in discussions about metals prices where words such as ‘uncertainty’, ‘caution’ and ‘risk’ are likely to dominate while trading conditions remain treacherous and volatility extremely high.
Since the start of the year, the price of copper has dropped 24 percent to around $7,200 per tonne while nickel, zinc, lead and tin have all lost more than 20 percent of their value. Aluminium has proved more resilient – down just nine percent in the year to date.
Sentiment has been soured by economic chaos and political inaction. The eurozone sovereign debt crisis is dragging on, the US faces the threat of another recession and, while China battles with high inflation and declining export revenues, a downturn in the world’s largest metals consumer seems likely too.
“If the eurozone can put its act together, if measures are put in place, if at last we get some decisive action from politicians and, if we get a resolution sooner rather than later, then maybe confidence will return and higher prices will be seen” Bhar added.
“But we’re walking on a very fine line at the moment,” he added. “There’s still a lot of uncertainties… about growth, about how the eurozone will play out, about credit lines and supply-side issues.”
This backdrop, analysts tell us, will probably persist well into 2012, with prices seen falling further.
“The restrained macro backdrop will mean that metal prices will trade in much lower ranges in 2012 then what was evident in 2011, at least during the first half of the year, as weaker demand will more than offset any supply related issues, particularly in complexes like copper,” Ed Meir of MF Global said.