LME WEEK 2014 – Chatter up and down the Lane

London 20/10/2014 – The annual LME Week, the metal world’s biggest annual gathering, started on Monday with a busy five days of meeting, events and functions, all centred on Tuesday’s gala dinner in London’s West End.

This year, the metals industy meets against a backdrop of gathering gloom over the economic outlook, as global equity markets tumble, while the LME continues to evolve and adapt after the 2012 takeover by Hong Kong Exchanges and Clearing Ltd (HKEx) for 1.388 billion pounds.

FastMarkets reporters are here as well – out and about at the various gatherings. Here are some of the key quotes and messages:

THE WEEK STARTS

“Our market remains as competitive as it always was” – LME CEO Garry Jones

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“It is a good opportunity to talk to all parts of the industry and judge the mood. Unfortunately, it looks like that mood is pretty downbeat” – Société Générale analyst Robin Bhar

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THE EVOLVING LME

“The exchange is now run by an industry-neutral owner – they want to expand the market’s global reach, they want to introduce new contracts and they have not attempted to fix things that structurally were efficient and not broken” – LME broker

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“We are focusing on the opportunities that collaboration with [China’s mainland metals exchanges] could bring. This might include cross-listing products with one of the Chinese exchanges, or pure China exchange partnership products” – LME

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“The LME will actually be in a good position as the yuan gains wider use, as with the Dalian market and others still to all intents are closed to global investors, the LME becomes an increasing source of liquidity” – Colin Hamilton, global head of Commodities Research at Macquarie

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“China is a slow and cautious beast but if HKEx opens the door that would be fantastic – if it is a nut we manage to crack, it could explode – LME trader

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“It’s going to be quiet at first but in times if there is liquidity people may be interested to use [a premium hedging contract]” – Far Eastern trader

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“We have to get used to the fact that [members] do not own the exchange now as shareholders – we are the users” – senior ABCM trader

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“The LME needs to look at liquidity on the contracts that are already in place before launching new ones. We are struggling to trade what existing contracts there are, let alone new ones” – broker

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“We are ready and the market is ready” – Rebecca Brosnan, HKEx MD of Asia commodities global metal division, on the Dec 1 launch of HKEx minis

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“With the way these contracts are designed, it seems that Chinese retail investors are the main target of the HKEx, and China has a huge market for base metal trading. It very much depends on liquidity and, if it’s there, there should not be a problem for this contract to pick up” – Lawrence Phua, commodities dealer at futures broker Phillip Futures

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“If over time this market is reshaped into an American-style exchange, then the very barriers that have prevented competition will disintegrate and lead to the erosion of our dominant position” – Metdist CEO Apurv Bagri at the LME Week dinner

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“We have no intention of [becoming an American-style exchange] but we would like to offer liquidity in as many tools as possible. There could be some instances of cannibalisation but really that’s not what we are doing, I think it is different participants [that would use it]. It’s not the launch of something new” – LME’s Jones

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“You always want insurance when it’s flooding; when the water’s receded a bit you might not want the insurance. Hopefully, the memory of the flooding makes you buy the insurance” – Jones on premium contracts.

CHALLENGES TO THE LME

“We do have the luxury of having the greatest distribution channel for liquidity in interest rates, energy and agricultural products. We have people who trade our Comex copper contract every day and have been asking for an aluminium contract to arbitrage against the LME” – Fred Penha, CME Group director for metals products

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“American manufacturers and end-users should not be gouged every time they make a can of soda or fill up their gas tank. The CFTC must start protecting businesses and consumers by using their authority to conduct a thorough review of the ongoing issues destabilizing the aluminium market and ensure that the LME is operating above board” – US Senator Sherrod Brown

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“It’s safe to say we are building this [aluminium] contract up. We’re seeing a lot of customers doing trials on this aluminium contract to make sure all the delivery mechanisms work properly. So far the feedback has been very positive” – Young-Jin Chang, CME director of metals research

FEES

“Retirement” – Michael Overlander, director of Sucden Financial, when asked about about his contingency plan if the fee increase remains intact

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“None of us are that daft to not know that the price that was paid [for the LME by HKEx] – the full price – somehow has to be recovered. But is there commercial logic in doubling the fees if it is going to have an impact on overall liquidity?” – Overlander

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“The industry needs to stand as one. We need more people to stand up to the LME and say that the fee increases are killing us, and will do more harm in the long run – they should have decreased fees as this would have actually attracted more people to the market” – trader

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“The discussions around the market structure and how this impacts different types of trades – we are more sympathetic to what people have to say. Whether we change anything, I don’t know. Fees are going up – we are not turning around on a sixpence here” – LME’s Jones

THE BIG PICTURE

“Last year the outlook had been bullish and upbeat. A year later, there are concerns that liquidity will be reduced as the Fed stops QE, people are bracing themselves for more volatility, and meanwhile the dollar is king. There is a lot of uncertainty” – SocGen’s Bhar

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“We cannot get too excited about how things look currently – despite the fact that supply/demand balances will continue to tighten going into next year” – Ed Meir of INTL FCStone

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“The recent downdraft in global equity markets will expose the sector if downgrades to global growth ensue” – Michael Lewis of Deutsche Bank

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PRICE OUTLOOK FOR THE METALS

“There isn’t much of a ‘buzz’ doing the rounds this week – we can’t really get too excited about prices for the rest of this year” – trader

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“Copper prices are trending down mostly due to the macro situation. For the first time since the financial crisis, all the major economies, except the US, are slowing down. It is not a great landscape for commodities” – Meir

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“Uncertainty about China has continued to weigh on copper prices. Demand has weakened on the back of tightening credit conditions – impacting the housing construction sector” – SocGen’s Bhar

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CHINA

“Slow growth in Europe will escalate China’s slowdown because Europe will be in the market for fewer Chinese exports. This has removed one of the more bullish features of the metals markets” – LME RDM Sucden

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“China is the world’s biggest economy and a slowdown of three to four percent [in GDP growth from above 10 percent] will have an impact on commodity markets” – BBC economics editor Robert Peston

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“We’ll see more stocks coming out from China to deliver into LME system in the short term as demand in China is still sluggish and credit remains tight” – China-based trader

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WAREHOUSING

“As the world’s leading base metals exchange, the LME has a duty to ensure the integrity of its reference prices and the operation of a fair and liquid market for all industry participants. To this end, the implementation of the proposed changes to the warehousing policy will take place as planned” – LME

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“Rusal continues to believe that the LME’s consultation process was procedurally unfair, resulting in a decision which was neither fair, nor proportionate” – Rusal.

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PARTIES

“Companies have reduced their expenditure and looking at cutbacks – hence no parties – they do not want to pay for everyone to get drunk, with no real action with their actual clients” – trader

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“Where are all the parties? There are probably going to be pockets of London with very extravagantly-dressed traders pitching up” – floor trader

(Compiled by the FastMarkets global reporting team)