LORD COPPER: Lessons from history for the LME

The trouble with looking both east and west is that it is hard to focus on one if you are being distracted by the other.

The trouble with looking both east and west is that it is hard to focus on one if you are being distracted by the other.

Look, for example, at German foreign policy from Otto von Bismarck through to the middle of the twentieth century. Natural expansion would come by advancing eastwards, but that would leave the western frontier potentially unprotected from French nibbling at territory like Alsace-Lorraine or the Rhineland.

The grand plan of von Schlieffen in the first world war was developed to obviate the problem. A swift attack on France – via Belgium – was intended to result in victory over that country in a matter of weeks, which would then free up the whole German army to attack Russia in the east, seen as the real objective. It nearly worked in 1914, but the unexpected resistance of the French resulted in exactly the squeeze that wasn’t wanted. Fighting on the eastern and western fronts simultaneously is what finally bled Germany virtually to death.

There was, incidentally, a brief moment when hope may have been rekindled, as the Russian revolution effectively stopped resistance in the east, freeing troops to mass in the west in March 1918. But by then it was too late, as millions of American troops and dollars were by then making their presence felt.

Again, in the second world war, the same policy was followed; this time through an agreement with Russia ahead of dealing with France, followed by a breaking of that agreement with the commencement of Operation Barbarossa. The objective was always the same: always fight on only one front to avoid being squeezed in the middle.

I’m not suggesting Martin Abbott is the reincarnation of Bismarck, but perhaps there is a lesson to be learned.

By its own admission – and with its new ownership how could one doubt this – the LME has firmly fixed its sights on expansion to the east. That is perfectly logical. Given the increasing share of global non-ferrous business that takes place in Asia, it clearly has to be the major focus of the exchange’s attention. However, in the excitement of the new, it would be easy to forget the importance of the old.

While it is true that the world has to keep moving forwards and that the age of Asia appears to be arriving like an express train, it would be foolish to desert the old faithfuls of Europe and the USA. Like Bismarck and von Schlieffen, the LME needs to be aware that if it concentrates purely on the east in its pursuit of ever-growing Asian business, it will remain vulnerable to a surprise attack from the west.

Nymex is not a new exchange needing to build its franchise. It already has a sustainable business in copper, and, though dwarfed by the LME official price, it provides a reference that is regularly used by parts of the industry.

If I were running Nymex, I would be looking to capitalise on the natural concerns over possible change and make a real play for expansion of the copper contract right now, during the lull between the LME deal being accepted and finalised, when, naturally enough, little will be able to happen.

From the LME’s point of view, it needs to understand that there is a fair degree of uncertainty about the pending changes among the trade. Apart from the tiny minority who actually voted against the deal, there are those who supported it – perhaps for financial reasons, perhaps because they felt they should not oppose the clear majority preference of the inner LME “family” – but with considerable misgivings.

A timely charm offensive to reassure those people could go a long way to protect the LME from finding itself fighting for its business in the west, while wanting to put its full efforts into developing the east.

Lord Copper
editorial@metalbulletin.com

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