LORD COPPER: Carrying the exchange forward after historic vote

The vote by LME members to approve the bid from HKEx means that, by the end of the year, the London exchange will no longer exist as an independent organisation. The pressure is on, therefore, to make the merger work

The vote by LME members to approve the bid from HKEx means that, by the end of the year, the London exchange will no longer exist as an independent organisation. The pressure is on, therefore, to make the merger work

Well, there we have it. However bright the new future looks, it is, for sure, the end of an era.

The LME members have voted overwhelmingly in favour of the bid from HKEx, and, once all the legal detail has been tied up, by the end of the year the LME as an independent organisation will no longer exist.

It will instead be part of a Hong Kong-quoted exchange conglomerate.

Having spent the bulk of my career so far working on the LME, I must confess to a tinge of sadness that the institution we all knew will have gone, butas I have said before here (or at least implied: I’ll now say it), had I been casting a vote, I too would have taken the money on offer.

The price was too big to expect the bulk of the members to do anything other than grab it with both hands.

I sympathise with the non-ferrous trade players who didn’t want to see the deal happen, and I share their concerns for the future. HKEx has won its prize, but now it has to come good with its effective stewardship of the market.

LME reference prices
The key to the success of the LME over its life has been the acceptance by the trading world of its reference prices and that is as relevant today as when those first traders gathered together in the 19th-century alleyways clustered around the Royal Exchange.

The legitimacy of those prices is what gives the LME its right to call itself the world’s premier metal market and the way prices are derived has to remain transparent and believable.

This is not only an issue for the trade, it is also vital for the responsible speculative money. If the LME price is the one the world looks to for placing realistic values on non-ferrous metals, then I would suggest that also means that any investor looking to earn money from metals will of necessity use that price as the basis for making their investment decisions; put more simply, if that’s what the world says a metal is worth, then it’s against that price that investment decisions have to be valued.

Of course, for short-term, high-frequency traders, that’s not true in the same way; but for genuine investment, a credible reference price is essential.

At the moment, that price is discovered by open outcry in the LME ring. Now, I don’t know how long the ring will survive; it’s been an open question for years, but HKEx’s guarantee that it will continue for two years throws things into perspective.

If that guarantee means what I think it does – that effectively the question of the ring is up for serious debate over the next two years – then there needs to be an equally serious discussion about how the price can be generated without the ring.

I’m sure through Select it’s perfectly possible, but the methodology needs proper consideration; it should not be something done in a rush.

The LME’s new management will probably have to be particularly attentive and sympathetic towards those in the trade who are concerned about the change of ownership.

Heading east?
It would be very easy, in the first flush of success, to ignore the naysayers. That would be a mistake. Undoubtedly, the new regime will help a (globally) necessary refocusing further eastwards, but Europe and the USA have been the cornerstones of the market’s business for a very long time and it would be an error to forget them in the rush of the new. They do have alternatives; Nymex will undoubtedly perceive an opportunity by portraying the LME as becoming an Asian-centric market. Smoothing some ruffled feathers will be a worthwhile exercise.

Then there are the bits that are important, but I honestly have no clue how easily or quickly they can be achieved. These are two of the real planks of the bid that made it attractive (apart from the money, of course); I refer to the introduction of Yuan-denominated contracts and the expansion of the warehousing system into mainland China.

I still have the same view I’ve expressed before, that these will be very difficult to deliver, as they require significant central government policy shifts, but obviously the board of HKEx is far closer to those decision-makers than I am, so perhaps my concerns are misplaced. Time will tell, but delivery of these two items is crucial to make the deal work fully.

So, these are just some initial thoughts; it’s done, and now the pressure begins to make things happen. Good luck to all those, existing members and newcomers, who will carry the exchange forward from here.

Lord Copper


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