Interview with Matthew Chamberlain, CEO of the London Metal Exchange | Fast Forward podcast episode 6 transcript

You can read the full transcript of our interview between Andrea Hotter and the London Metal Exchange’s (LME) chief executive officer, Matthew Chamberlain, for Fast Forward podcast below. Or, listen to Fast Forward podcast on Spotify, Apple Podcasts, Amazon Music or wherever you get your podcasts.

Full transcript episode

Andrea Hotter [AH]: Welcome back to Fast Forward, a podcast by Fastmarkets. I’m Andrea Hotter, special correspondent at Fastmarkets, and I can’t quite believe it, but this is the sixth episode of our series focused on the critical minerals essential for the world’s energy transition.

If you missed episodes one to five, do not worry. They are available to download on Apple Podcasts, Spotify, or wherever else you get your podcasts.

Now, today’s guest is the person who runs the company at the heart of the trade of global metals, many of which are deemed to be critical. I’m referring to the London Metal Exchange and to its chief executive officer, Matthew Chamberlain.

Matt got involved with the LME when he was heading European financial technology coverage at UBS. He worked as an advisor on the acquisition of the LME by Hong Kong Exchanges and Clearing, and was persuaded to move to the LME once it’s acquisition was announced in 2012.

Once there, he rose rapidly through the ranks, running LME business development, becoming chief operating officer at the end of 2016, and then interim CEO in January 2017, before taking over permanently in April that year. He was just 35 when he became CEO. And fun fact it was the first time in the LME’s history that the job had been given as an internal promotion. So Matt, thank you for joining us today.

Matthew Chamberlain [MC]: Thanks for inviting me.

AH: Okay. So this, as you know, is a podcast about the energy transition. So far during the series, we’ve heard about government policy; we’ve talked with the head of a major commodities trading company; and we’ve assessed the outlook for various markets, including lithium, battery raw materials like nickel and cobalt, and also copper.

So, it seems fitting now to turn to the LME and see where the exchange fits in with the energy transition. And I think that’s probably where we should start, Matt. The LME is an-147-year-old forwards and futures Exchange in London. What does it have to do with the energy transition?

MC: It’s a really interesting question, and in the 147-year history, I haven’t been there for all of it, the LME’s core products have facilitated a number of transitions. So actually, if you go back to the whole reason that the LME started in a formal way back in 1877, was because you had the industrial revolution here in the UK.

Initially, the UK was reasonably self-sufficient in what we might now call critical minerals and obviously critical minerals depend on the time and the country, but two critical minerals back then were copper and tin, which were absolutely fundamental for the industrial revolution, for the first stages in the first electrification revolution.

And, what happened at some point during the 19th century is that the UK’s demand for those metals began to outstrip its supply. The mines down in Cornwall, if you watch Poldark, they were not able to keep up with demand in the UK and so there was more of a need for organized importation of copper from Chile, tin from what is now Malaysia and you started to see this global trade, which over time formalized into what we now have on the LME. So, I think in many ways the LME has always been about critical minerals. Perhaps what’s changed is which minerals are critical and the particular ways in which they’re critical. But the metals that we now trade on the exchange, those six major ones, copper, aluminium, tin, nickel, zinc, and lead, are all in our view, and I think in the view of the market, absolutely crucial, whether you define them as critical or not, and whether you have legislation that defines them as critical or not, they are all absolutely crucial for the next stage of that, electrical revolution, which, I know you’ve spoken about on, previous podcasts.

AH: Yeah, that’s absolutely right, obviously with that criticality comes the desire to be sustainable as well. The LME has been very active in terms of sustainability, arguably more so than most exchanges. You’ve introduced all kinds of things that we’re going to talk a little bit about today, responsible sourcing, you’ve created a platform for sustainability disclosures, and you’ve introduced various new contracts based around the energy transition.

You weren’t mandated to do that by governors or regulators. That was a choice. It’s actually a huge amount of work. So, I’d like to start by asking, what do you see as the LME’s role when it comes to the energy transition? I mean, why did you bother? Whose job is it to make the industry more sustainable?

MC: I think you raised some really important points there, and maybe the first one  that I’d start with is the, I think, very genuine debate, and I don’t claim to have a  conclusive answer on it, about what I call the input and output sustainability of these metals.

So, we know that we’re going to need a huge amount of copper to go and electrify the grids, in order to allow everyone to charge electric vehicles. We know we need a huge amount of nickel, for the batteries that are going to go into those electric vehicles. And so, you could make an argument, and I think some people do make an argument that says, the imperative to electrify and to decarbonize is so significant that actually you should give people a pass on how they get the input materials, right? That actually, what you want to do is just encourage that transition to happen as quickly as possible.

I think the broad consensus, though, is not there. The broad consensus is that, as well as these materials having an output benefit, they themselves have to have a sustainable input. They have to be sourced in a sustainable way. It’s not good enough to say I’m going to use this copper for a good purpose, and hence I can turn a blind eye to the conditions in which it was extracted and refined. That I think is where most of the world is, and it’s certainly where the LME is.

So, you then come to this question of, okay, what’s the LME’s role? Because we operate as part of a free market. And so you could have a model where you say, actually, the LME doesn’t need to have anything to do with the sustainability of metals traded on its market, that the LME’s core function, certainly as it was back in 1877, is achieving and helping people manage a supply of metallurgically appropriate metal, and actually questions around its ethical characteristics are for others to go and deal with through whatever market mechanism, they want. You might say, well, a consumer who wants a metal of a sustainable nature should simply pay a premium above the LME price and if you just pay the LME price, you don’t have any guarantees around sustainability. And again, that’s not an unreasonable position to take.

And indeed, it probably was the position the LME took right up until about 2018. What changed for us in 2018 was a real sense from our stakeholders, and that’s a very broad set of people. It’s the banks who trade, who obviously have sustainability requirements. It’s the customers, the end users who are pricing off the exchange. It’s civil society who obviously have a stake in what’s happening. It’s regulation, with the conflict mineral rules coming out of Dodd Frank and the EU.

All of those things came together to say to the LME, actually, you need to start to take a role in this, and that was the start of our responsible sourcing journey back in 2018 – an almost philosophical discussion and it was absolutely not unanimous within the LME and it was not an easy decision, this philosophical point that we need to be involved in that discussion.

AH: And that makes sense, almost an ethical push as well, but I’m sure to a certain extent, a kind of a commercial one too, if you found that at some point everyone else was selling low-carbon brands you were left with an old specification that wasn’t consistent with what anybody was trading then that makes the exchange less relevant. So I think there’s also a push on that front too.

Let’s run through a few of the initiatives briefly, if you don’t mind. So responsible sourcing, I’m going to try and summarize it in just a couple of sentences, because it’s obviously very complex. In summary, producers of metal listed on the LME need to demonstrate their alignment with OECD guidance for responsible supply chains. They do that through a combination of disclosures and standards. And the goal is to ensure that supply chains of metal traded on the exchange respect human rights and don’t contribute to conflict financing or corruption.

Doing that through an entire supply chain sounds incredibly complicated. How’s that going?

MC: The practical reality is, as you say, breathtakingly complex. I think we are extremely fortunate that at around the time that we had made that determination about playing a role within this sphere, a lot of work had been done by others. And so an absolutely key antecedent for our initiatives was the work that had been done by the OECD.

It provided, I think, the first multinational multilateral basis for one to differentiate between using very broad inverted comma terms, “good” and “bad” metal, right? And this is only certain dimensions because it’s about conflict finance, about corruptions, about worst forms of child labor.

But importantly, it is the set of ethical dimensions where there is global buy-in. The OECD is obviously an incredibly respected organization, incredible power, but they don’t actually have the ability to impose binding rules on market participants.

And the LME, it’s funny because we’re a pretty small organization in relative terms, but we do have this one huge privilege and this huge advantage, again, going back to when we started in 1877, we’re a physically delivered market and therefore we maintain a list of the brands of metal that you can deliver to satisfy an LME contract.

So, when an LME buyer and seller, when their positions come to delivery, the seller has to give metal to the buyer of a particular brand that we have authorized and over time that brand list has become incredibly valuable because people want to be on that brand list because it is kind of the list of “good” metals in a broader context.

So, where we came to the party as it were, was that we were able to say, okay, we’ll take this great work that’s been done by the OECD. We should absolutely not then overlook the roles of the industry bodies and the standards bodies who then set, more granular rules and audit processes for how the OECD principles are analyzed against a particular metal. And then we finished the puzzle.

We were the last piece in that we then said, okay, it is now, as of 1st of January, this year, a requirement if you want to stay LME listed as a brand, you’ve got to demonstrate your adherence to the OECD principles via, a number of different tracks very much around the work the standards, bodies and industry associations have done. It’s important to emphasize this is only possible because there was this consensus that emerged, in the mid part of the last decade through to say 2020, that this was the right thing to do.

AH: So, Matt, tell me, that makes sense, but what happens where a brand can’t comply with the policy or chooses not to? I know you’ve said, previously that the brands will be delisted or temporarily suspended until they do comply. Is it correct to assume that this has happened in some instances? How much compliance do you actually have?

MC: Anyone who’s subscribed to the LME notices and has the joy of a daily LME notice in their inbox will know that we’re adding and removing brands all the time, and that can be for various reasons. But you will have noticed that a number of brands were delisted at the beginning of the year.

Now, I’m absolutely not going to go and say, this brand was delisted for responsible sourcing, or this one wasn’t, because that wouldn’t be fair. It’s not for us to start talking about entities like that, but in the aggregate, a number of brands were suspended at the beginning of this year, because they didn’t quite get there on the responsible sourcing.

And again, I want to emphasize that that no way suggests that there are bad things happening in their supply chains. It was just that they hadn’t quite been able to get over the line on the documentation and the assessment. And if they’re going through a standard body, getting the sign offs from auditors, et cetera.

We did suspend, around 10 percent of our brands at the beginning of this year as a result of that. So I think it’s very clear that this initiative does have teeth.

You can’t see this kind of thing as a sort of punishment and execution exercise. This only works if people are encouraged to then move towards compliance. And actually, the really pleasing thing for me through this whole process, what we’re seeing now, is some brands who were suspended earlier this year coming back on because they’ve now managed to do the work. That’s just a real sign of the positive feedback loop that this type of initiative can drive.

AH: So, you mentioned compliance there and obviously that’s very important. Tracking and tracing plays a role here, right? I mean, what does compliance look like? Like anything, I’m sure there are shades of grey.

MC: This is a reason why the industry standards are so important, because the specifics of how one tracks and traces, how one goes back to the mine site, how one assesses chain of custody as ores move through the processing system and get to smelters – because remember, for the LME, it’s the smelter, which is effectively our entry point – we’re approving the output of the smelter. It demonstrates the, importance of the standards, in allowing, firms to comply with the underlying OECD requirements.

AH: Well, here’s an idea for you. What about the exchange creating a platform, blockchain or digital, to achieve traceability. You’ve got a master’s degree, if I’m correct, in computer science from Cambridge university. I know you like a challenge, Matt. This sounds like it’s right in your wheelhouse.

MC: So, I think people who know me know I am a big fan of the, blockchain, digital assets world. And I’ve been really interested in the work that’s been going on around traceability on distributed ledgers, both in terms of traceability, from mine site through the processing cycle, but also tracking and allowing tokenized ownership of metal in our warehouses. It’s very interesting. So, I think distributed ledger systems have a role to play here. We haven’t seen, an obvious, player emerge, but there’s a number of firms who have some fantastic innovative technology, and certainly we stay in very close contact with them.

AH: Well, you mentioned warehouses there. This was the impetus for another initiative. LMEpassport, which is an electronic register for sustainability credentials, but it started out as an idea for certificates of analysis, which record metal physically delivered into and out of the LME ecosystem.

If I recall correctly, LMEpassport was originally meant to solve a really long-standing industry problem, which was that those certificates of analysis were paper based and incredibly admin-intensive. Obviously, it’s moved to be a digital register for sustainability credentials starting with aluminium in 2021 and you’ve gradually phased in other metals over the last three years. What are we talking about here? Which sustainability metrics does it include?

MC: LMEpassport is something that we’re very proud of. It’s an example of how a system and initiative can really grow when it gets industry support. So exactly as you say, it started as a digitization of the underlying paper certificates of analysis, with the metallurgy, of the metal.

So now whenever you take metal out of an LME warehouse, you have a digital record of its sampling, its impurity levels, which is a very helpful when you’re working out how to blend that in a downstream application or a rod mill. But there was quite quickly a realization from us and from our users that we could do a whole lot more. And so, we quite quickly extended the system to allow sustainability data to be disclosed. There’s currently on the system about 57 different sustainability metrics that can be tagged onto metal.

The most straightforward one, which many listeners will be familiar with, is carbon content. So what you can now do, as a brand, as a producer, you can upload your audited carbon footprint data. And obviously, as I’m sure the listeners know, there’s a huge science and art around the different measurements and the different standards and the different scopes and the system caters for that. So, it doesn’t try to pretend things are comparable when they’re not. It allows you to disclose under different standards, but then it doesn’t pretend that those are directly comparable numbers.

But then when a user withdraws metal of that brand, their certificate of analysis, their electronic fingerprint effectively is tagged with all of that sustainability data. So, if you are a downstream user, who’s trying to compile your Scope 3 data for the carbon content of your input materials that becomes incredibly valuable information. But again, it’s more than carbon.

It allows you to tag data on water resource stewardship, alignment with various standards. Topics like indigenous rights, are equally important in terms of understanding the overall ESG footprint of the metal. And it’s very much that principle of user choice. Unless there is global alignment as there was on the OECD, we’re not in the business of prescribing other metrics like carbon, but we’re absolutely in the business of making it transparent.

AH: And it’s not just LME brands on the register though, correct? Non-LME brands can also register their credentials?

MC: That’s right. The system does support non-LME brands, because we want this to become, as much as possible, a central hub where users have a one-stop shop for all of the metal they’re taking into their processes. And obviously there are some for example, value add products, alloys that are not LME-deliverable, but are very much aligned with the underlying LME metals, and we want to make that accessible on the system as well, if that’s what producers would like to disclose.

AH: All right, well, and now onto the next thing, the LME said it planned to follow the launch of Passport with a spot trading platform for sustainably sourced metal.

So that means using the data from LMEpassport to determine whether the market for low carbon metal, for example, is big enough to support the launch of new contracts. Am I right to assume that?

MC: As you say, trading is absolutely the next theoretical step. Now, as I’ve already mentioned, I don’t see that it is the LME’s role to set thresholds where there isn’t as close as possible to global support. So, if I take carbon as an example, we’re not going to be to saying that to trade on the core LME market, you must have a carbon footprint of under 20 tonnes of CO2 per tonne of aluminium.

What you want, in my view, is some kind of voluntary platform where people can trade a higher standard on whichever dimension they wanted, if that’s what they chose to do. Now, we know, from bitter experience, that launching a new futures contract, a physically-settled futures contract, is very difficult.

There’s an additional danger here that you could split liquidity away from your main contract if you have an LME normal contract and then an LME plus contract, LME premium contract, whatever you’d like to call it. So, the way that we are approaching this is through spot platforms.

A spot platform, unlike the LME futures platform, doesn’t allow you to trade metal for future delivery, it only allows you to trade metal for delivery normally in two days’ time or something of that nature.

And that tends to concentrate liquidity on that spot market. We think this is a very interesting opportunity. And maybe just to give you an example of where we have done this. Nickel everyone’s probably aware of the challenges we had in the nickel market back in 2022. And a big part of the recovery from that was to make sure that we had a lot of new nickel producers listing on the LME so that we had the underlying physical liquidity to regrow the contract, which thankfully has absolutely happened. But that then led to a lot of criticism of the LME that we were not providing a market for producers, for example, from Australia who felt that their product deserved a premium, because of the environmental or other sustainability characteristics, which they believe attaches to it. And again, we didn’t feel it would be appropriate to go and change the underlying LME contract.

But what we did together with Metals Hub, which is a German spot trading platform who we have a partnership with we launched to use the broad term, a green nickel contract, low-carbon nickel contract, using standards from the Nickel Institute.

And actually that’s been fantastic: started to ramp up in April, 171 tonnes offered, May 216 tonnes offered, July, 264 tonnes offered July, 168 tonnes of low carbon nickel were traded on the platform.

And you might say, well, these don’t sound like big numbers and they’re not, but, this is about growing a market. And that’s why a spot platform is a great way to do it. So, that’s really our approach on trading. I think nickel has provided a fantastic, path forwards we are, continuing, and looking at other opportunities along those lines.

AH: All right, so watch this space, see where we go. Let’s talk a little bit now about the Carbon Border Adjustment Mechanism or CBAM, which sounds very technical and it is to a certain extent. Its goal is to prevent what is called carbon leakage, which happens when carbon emissions increase in your country, because you imported something with higher carbon emissions for another country, simplifying it.

It’s like when a country’s offshoring its emissions. CBAM is relevant here because it applies a carbon related cost to certain imported products into the EU, including aluminium because of those direct emissions that are associated with them. So linked to all of this, the LME is proposing to introduce mandatory emissions reporting for producers of all listed brands on the LME of aluminium. So, you’ve had a consultation, what are next steps?

MC: CBAM is absolutely a key topic here. And as you say, we have got this consultation and we’ll be coming out with our next steps very soon.

So, I don’t want to spoil the surprise, but what I would happily say is that I think there was a good response to our proposals. We don’t want to go around compelling people to provide every single piece of sustainability data. LMEpassport is very much a voluntary platform, but with CBAM, because the EU is such an important part of our market, because we have so much aluminium sitting in places like Rotterdam or Antwerp or Trieste, we think that there is a very strong case to ask for that data to be disclosed because then it helps end users of the LME market in exactly the same way as if you buy an LME warrant and you get your 25 tonnes of aluminium, you expect to see the metallurgical quality because otherwise you’re going to be scared about putting it into your furnace.

If you’re a European player and you don’t get the CBAM data, then you’re going to have to pay a very high adjustment mechanism because the default factors will apply. So, this is an example where it impacts such a large portion of our market that we think it’s fair to ask for that data to be disclosed and so we can give confidence to users that they will get that data when they take LME metal.  I very much support the proposal. I think it’s going to be really helpful for anyone importing LME metal into the EU, but more broadly, it will provide a strong comparability.

AH: You just mentioned there that this exposes EU producers and importers to carbon price risk. That is a very interesting development because I wondered, could we see the LME lead the way on carbon trading, for example?

MC: Yeah, we have discussed it. I think the challenge for us is that although metals obviously do have a carbon footprint, it’s quite a small carbon footprint compared to perhaps some of the other energy markets.

I’m not sure that the LME, simply by virtue of its metals footprint, would have enough market oomph to really be able to crack the carbon market. And it’s therefore not something that we’re proposing to do right now, but I think carbon will be very important. As you say, what you may end up having is a stapled metals and carbon future, so that you are managing your total price risk at the CBAM border. And as more countries go down that route, it’ll become, I think, even more complex. That’s something we can certainly approach on a partnership basis.

AH: Okay. So, well, if we’re not likely potentially to see, carbon trading be the new thing for the exchange, you have launched a number of other new contracts in the last few years, lithium hydroxide and cobalt contracts, which are both based on Fastmarkets assessed prices, and they’re on your website under EV contracts, actually.

You’ve also launched various scrap contracts and US aluminium scrap, regional steel scrap for India and Taiwan. Any more contracts planned?

MC: No, I think again, we have to recognize as the LME, because we’re quite a specialist market, we don’t have quite the same distribution footprint as perhaps some of our peers.

And so, we have to be quite selective about what we do. I think of the cash settled contracts; it’s really been those steel ones that have been most impactful. We’re really pleased with how they are continuing to grow and that’s really because, there’s a strong crossover with, the base metals users.

AH: On the new contracts front, the LME decided not to launch a class two nickel contract. Now that we’re talking about nickel and seeing as you mentioned it a little bit earlier, where do things stand with the court of appeal and the lawsuits, et cetera, against the LME.

MC: We had the appeal hearing in July and people will remember that we were very pleased that we won the 1st instance hearing last year. There was an appeal hearing in July. We continue to wait for a verdict there. But we feel very confident in our position and in the decisions that we took.  I think, more relevantly is what’s happening with the nickel market because our key aim was always to restore the liquidity and nickel, that was so impacted, by the events back in 2022.

And that’d been a huge area of focus. I’ve been really pleased to see the nickel market regain its liquidity. We’re now at levels so far in 2024, obviously above 2022 and 2023, but actually now rivalling 2020 and 2021 in terms of average daily volumes, which to me suggests that the vibrancy of that market is back.

And I think that’s a combination of obviously the steps that we’ve taken as a result of the independent review and significant investment we’ve made, but frankly, also the goodwill of the market. I think we’ve really been grateful for the way that the market has stood by us in this, they’ve encouraged us on that reform journey.

We spent a lot of time talking about Class 2 with our stakeholders and in the end, what they told us is, look, LME, just concentrate on the Class 1, take the steps, to rebuild the liquidity there and we’ll support you

They’ve been true to their word. We’ve taken the steps that we needed to and they have reciprocated by bringing back liquidity to the levels that I mentioned.

AH: You mentioned there a reform journey. So, I’d like to take a bit of a diversion here, Matt. I think it’s probably an appropriate segue. There’s been a big announcement by the LME recently, and it would be wrong to ignore it today. So, I’d like to ask you about it, if you don’t mind.

The LME is very much an industrial exchange with the physical community at its heart. It’s very unique in how you trade its contracts, but it’s been trying for some time to attract more of the financial investment community. Efforts in the past have arguably not been a huge success though, but at the start of September, you issued a white paper laying out a plan that you hope will change all of that. So Matt, over to you. What exactly is the LME planning to do?

MC: Thanks for mentioning because this is an important topic. Maybe for those who are less familiar with the LME, we’re a very differentiated exchange because most exchanges allow you to buy and sell a contract, commodity in this case for a single point every month.

So, you might have a November copper contract, a December copper contract and so on. The LME, again, going back to that history that I mentioned earlier has this incredible date structure where you can buy and sell metal for any day, from one day forward, so tomorrow through to three months, any week from three to six months and any month beyond that.

And that’s a really important feature for our physical users and that’s never going to change. That’s a very bespoke request. But within the daily date structure, there is a monthly date structure embedded at the LME. The third Wednesdays of each month are the established convention for how you trade the LME in a monthly manner if you’re trying to trade it like all of those other exchanges.

And in particular, financial participants like to keep their positions, their open interest, on those monthly dates. Actually, this is really relevant for the broader debate, because we’re in, I think, this incredible position in the metals industry that everybody knows metals are going to be crucial to the transition that we’ve just been discussing.

An increasing number of financial players want exposure to those metals. The LME is the natural place for that to happen, but they look at our market structure and they say, Oh, that’s just a little bit complicated. That’s a little bit difficult. We’re going to go and look elsewhere.

So, all we’ve announced in the white paper is that for those monthly dates, particularly those financial users who want exposure to those monthly dates, we’re going to align with our global peers, with other exchanges, and have what we call a block limit.

And what that means is that if you’re trading a small amount of those third Wednesdays, that needs to be shown on our central, electronic trading system, LME Select, rather than simply being a bilateral trade between a client and a dealer.

It all sounds very market structure-y and technical and geeky, but what it means at heart is that if you log on to LME Select, our electronic system, you’ll see what we already have – which those six contracts, which are crucial for the energy transition – and you’ll see good liquidity and good pricing for each of those monthly dates where you might want to invest to get exposure to those, if this is a thematic theme that you want to participate in.

There’s a lot of work to do, a lot of industry engagement, et cetera. But we think that what we’ve announced is going to really help all those players get better access to metals, which I think is going to be crucial over the next 10 years.

AH: I’m curious why you’ve decided to do this now. Obviously, you tried a decade ago to attract financial players and incentivize electronic trade, but it backfired, caused a lot of friction with members and a lot of business moved to the OTC market. I’m wondering why now, and is this in any way linked to the nickel situation in 2022 and actions that the LME committed to take to improve transparency after that?

MC: So, certainly with the nickel situation, and I think people will know we commissioned this independent report from Oliver Wyman, and one of the recommendations that it made is that the LME should look to standardize its market structure where appropriate, without loss of functionality to existing clients because there is a sense that the more standard your market, the more liquidity you’ll get. And that provides a liquidity pool in which everyone can participate even when pricing is becoming more volatile. Certainly, the Oliver Wyman report does draw a linkage, and we should respect that.

But we have now embarked on this modernization journey and yes, that probably did start with some of the immediate initiatives around nickel, things like OTC disclosure, things like our daily price limits, perhaps aligning more with some other markets. Then we did our closing price reform. It’s really that momentum, that confidence to then move on to the next market modernization, market improvement step, which is this enhancing liquidity white paper.

There is a degree of linkage to nickel, but I think it’s more a story of continual improvement, continual modernization, and making sure that when this energy transition fully arrives, we are ready. It’s not just the LME as an exchange, the business, we as a community, right? Our members are ready to benefit from that. Our clients are ready to benefit from that because I think we would all regret it if this incredible decade for metals does, manifest itself, and we’re not as good as, we can be to benefit from that.

AH: And why are you focusing only on small trades? I was curious. Why not bigger?

MC: We want to learn from our peers. There’s a lot of exchanges out there who use these block limits and generally the approach is that if a trade is large, then, it is right to allow that to be executed in different ways because it could potentially have a price-moving effect on the market.

So, traders end users, who need to put through a very large trade generally will need that flexibility, which is why block limits generally are set the way they are, such that trades above a threshold are not subject to that central execution requirement, whereas trades below a threshold are. This is generally how it’s configured in the industry.

AH: We’ve seen a lot of business move to the OTC market over the years. In your own words, what’s wrong with people using the over-the-counter market, the OTC market?

MC: This is really about how members give price exposure to their clients: there’s two ways of doing it. One is they can give them an LME client contract, as we call it, which is registered with our Exchange, booked at our clearing house. And then the other is the over the counter or OTC market.

We have seen over the last 10 years, more and more business go to the OTC market; I think, frankly, because in many cases, it’s easier for members of banks to manage that – they can put their own margin requirements on etcetera, so it just gives them more flexibility. Our approach to the OTC market is very clear, which is absolutely any members’ right to go and service their clients on an over-the-counter basis.

Not for me to say that’s wrong, but if those OTC contracts embed LME prices, which in the metals world, they very often do, we think it’s fair that people trading OTC play their part for the overall market.

So back in 2018, we put in place, what we call the OTC booking fee where we ask people trading OTC on the basis of our prices to pay, to embed those prices, to contribute towards the infrastructure at the LME that generates and checks and validates those prices and makes them as representative as they are.

And with the white paper announcement, we’re taking a similar approach in which we’re saying, if you’re running an OTC trade below the block limit, we would like it to be subject to the same transparency requirements as an on-exchange trade. So you can still, give the client an OTC fill, but we would expect the underlying trade to be shown on LME select, so it builds liquidity, builds pricing, and contributes to the value of those LME prices that then go back and underpin the OTC.

AH: You know, one statistic I found fascinating in the white paper was that less than 1 percent of LME volumes are traded in the ring; 48 percent are traded electronically on LME Select, which I actually thought would be a lot higher. And the remaining majority is traded bilaterally inter office, which often, you know, typically means negotiated in the telephone market. How much do you expect electronic or LME Select volumes to increase as a result of this plan?

I’m just wondering how transformative these changes are going to be?

MC: So it’s a great question. And it’s not one that we necessarily have a target on because I’m not really going for a particular percentage. What I want is a market where every client who wants to trade electronically can do so, and every client, who wants to take advantage of that bespoke date system can do so as well.

Other exchanges, their electronic proportion is 90, 95 percent and that makes sense for them. That’s probably never going to be the case for us because all of those physical averaging trades, cash prices, broken dates, as we call it on the LME, they’re always going to be bespoke and probably not suitable for electronic execution. That’ll always be in our telephone or inter office market. We have no problem with that being a reasonable percentage of the business. What we just want to make sure of is where the client wants that ability to trade electronically, they can.

The story that I always tell here is that I obviously spend a lot of time talking to clients and sometimes I’ll see several clients a day and you can absolutely have an experience where you see one client in the morning and they say, I wanted to buy some December copper on your electronic market, but there was no liquidity there and you go and see someone in the afternoon and they say, I wanted to sell some December copper, on your market and there was no liquidity there and you think, guys, I just need to put you in the same room and you can talk to each other but that’s what the LME system should be doing, right?

The LME system should be bringing them together. But the reason that it’s not there is, nobody wants to go first. You don’t want to put bids or offers into an empty screen because then you’re quite exposed. And again, we have to learn from other markets – other markets solved this problem long ago by simply making it a rule that that business comes on.

So, the guy who’s buying, knows that the guy who’s selling is going to be there and vice versa. That’s all that we’re looking to do here.

AH: Sounds a bit like online dating. So Matt, how long do you think it’s going to take before we see any meaningful change in volumes? I mean, is this an overnight game or a slow burn situation or something in between?

MC: No, even just implementing this is going to take about a year because we need to do this in a structured and a respectful manner. We’ve come out and said, this is what we want to do. But that doesn’t mean there’s not going to be a lot of conversation.

We’re going to set up member working groups to make sure that the new rules will operate effectively with all the different ways that members do business. We don’t want to stop any business hitting the market, and then we’ll need rule changes. We’ll consult on those and then members will need to make systems changes.

You’re not going to see this implemented until the back end of 2025 and it wouldn’t be right for us to rush it. So, it’s not going to be an overnight story. But I think it could be quite transformative – once these rules are in, I think we’ll quite quickly see that business start to form on the electronic market; all those people I mentioned who you tell me they don’t have the liquidity, I think they’ll be a lot happier. They will feel their execution experiences better. And then, and this is what’s really crucial – those players who love the idea of metals exposure, love everything we do on the physical side and the price relevance and the macroeconomic relevance, but just can’t get over our market structure, they will look at it and say, ah, you know, the LME has actually done something here and we believe that they will come in and participate.

And if we were speculating for new business while harming existing customers, obviously I wouldn’t do it. But what I love about this is I strongly believe this can provide better execution for people who want it on third Wednesdays, a route into the market for people who don’t currently trade it, without in any way harming existing physical traditional players. And actually, I think they will benefit as well, from the overall enhanced liquidity in the market. I feel pretty confident about this.

AH: A balancing act, but also important not to kill the goose that lays the golden eggs.

Matt, every episode I asked the same couple of questions to our guests. So firstly, what’s one thing we might be ignoring, but we should be paying attention to related to the LME?

MC: So, I would go back to, LMEpassport, right? And, you know, you can, you don’t have to have a login. You can just go to the LMEpassport website. There’s a link on our web page and see the disclosure that’s there, the data, the curation, because I think it is a great resource for understanding how the industry is beginning to approach these questions, seeing the fantastic disclosure that comes from the producers.

We don’t always talk about it, but I think it’s a great sign, not just of what the LME can do, but actually underlying that data, what our industry can do because I can’t think of an industry that in a 10-year period effectively has undergone such a fundamental embrace of sustainability, of responsible standards, while at the same time, continuing to produce metal that drives all of our everyday lives and drives the energy transition.

So, I’m actually really proud when I log on to Passport of what that means and being part of an industry that doesn’t always get the best rap, but that does a huge amount of work on making sure that we have a sustainable metals future.

AH: All right, I’m making a note to bookmark the passport page. And secondly, if you had to fast forward a decade, what do you think the LME is going to look like?

MC: Well, it goes back to really what we announced a few weeks ago and the white paper. It’s about an LME that is fit for the future. The history of our exchange coming back to 1877 – businesses do not survive, markets do not survive for that period of time unless they adapt and the adaptations the LME has been through, be they metallurgical adaptations.

The conversion from sterling to dollar contracts, which I wasn’t personally around, but I understand was pretty controversial. You know, we have adapted and changed and evolved at every stage. And yeah, there’s always been discussions, there has always been, objections, but the community has rallied round and moved on.

And so, the LME of 10 years’ time is going to have all the great things that we have right now. It’s going to have that dates structure. It’s going to have the daily physical pricing. It’s going to have the warehouse network. It’s going to have the investment in the physical that I don’t think anybody else can offer to the extent that we do.

But it’s also, I believe, going to have a really easy way for those who want to have participation in the metals industry to do so. And I think if we can continue to blend all of those things together, like we’ve done for 140-something-years, if we can continue to channel that spirit, I think it’s going to be an incredible place, to trade, an incredible place to work, and I’m really excited about it.

AH: That’s a very positive outlook! And now, let’s take a quick break from the interview to hear from one of our in-house experts here at Fastmarkets.

Imogen Dudman [ID]: Hi, I’m Imogen Dudman, a senior aluminium reporter here at Fastmarkets, working out of our London office. As Matt said, LME first began its passport at the end of 2021 with aluminium and the recent consultation on the exchange’s proposal to integrate mandatory emissions as the industry prepares itself for the full adoption of CBAM regulations in January 2026.

Aluminium has been one of the most advanced base metal markets across recent years in its work to demonstrate its sustainability credentials and more generally seek to decarbonize its production. As Matt referred to previously, LME passport, of course, covers not only factors such as pollution mitigation and other climate change related topics, but also measures such as human rights assurances and risk management.

If we focus more on the sustainability side of things for now, let’s talk a little bit about what low carbon aluminium looks like at Fastmarkets and within the wider industry. For anyone who isn’t an avid Fastmarkets low carbon aluminium fanatic, Fastmarkets methodology currently defines low carbon aluminium as maximum of four tonnes of CO2 equivalent per tonne of aluminium produced under scope one and two emissions.

To give this some context, according to data released by Fastmarkets research team, average CO2 emissions in primary aluminium produced in Europe currently stands at 6 .7 tonnes, while average Chinese production stands at 20 tonnes of CO2 per tonne of aluminium produced. The global average cradle -to -gate emissions in 2022 set at 15 .1 tonnes of CO2 per tonne of aluminium produced, according to data from International Aluminium. The industry has been working to clean up its act, and the global average in 2022 dropped by over 4% from 15 .8 tonnes of CO2 the previous year.

Fastmarkets launched its aluminium -low carbon differentials back in March 2021, and when you look at the market now, you can see just how far things have progressed, not only in Europe. In 2021, aluminium producers were working to decarbonise their production, but consumer appetite to specifically procure lower carbon brands was less widely adopted.

Fast forward three and a half years and we see increasing consumer demand for green production both inside of Europe and beyond, partly as a result of company specific ESG policies, but also as a result of increased legislation implementation, such as with CBAM. This has brought with it the emergence of green premiums being achieved for certain low carbon transactions.

Fastmarkets has since launched a number of different low carbon references, including differentials for both the United States and also for Asia.

European consumers, traders and producers are and will need to keep an ever-closer eye on low carbon credentials amid the ongoing transition to full adoption of CBAM, whereby importers must submit quarterly reports on the quantity of aluminium goods imported into the EU and the greenhouse gas emissions released as they were produced.

Following the recent energy crisis and periods of low regional demand, the European market has become increasingly reliant on imported tonnes. So it’ll be interesting to see for sure once CBAM gets enacted in full force how the market reacts and continues to evolve in this low carbon space.

AH: And now, back to the interview.

So Matt, to finish today, I’m going to pose a couple of questions that I sourced in advance from social media. So here is the first one for you. Importing countries are pursuing strategies to reduce their supply chain risks, seeking supplier country diversity. How do you see traders adapting? I think that’s a really good question.

MC: The LME is, at its heart, a global market and our history has been one of expanding the global pool. So, it’s actually funny, it’s only in 1989 that we opened LME warehouses in the US.

It’s only in 2000 that we opened LME warehouses in Asia. And, you think of that LME network now, and that globalism, is a big part of who we are. I’ll be very honest. The trends towards deglobalization that we’ve seen are challenging for a global business model like ours. And we see that in sanctions. You know, we’ve done a huge amount of work this year, in terms of ensuring sanctions compliance around Russian metal.

I won’t deny that these things are at their heart a little bit at odds with the LME’s concept of a global duty unpaid contract. But I think we’ve adapted well. In terms of supply diversification, if I’m a consumer and I want to make sure that I’m sourcing my copper from a variety of different countries, so I don’t become dependent on any one country, or maybe I have particular countries that I feel more comfortable with that’s absolutely something that can be done. We have a global price. Our members have an incredible business in warrant trading so you can go to one of our members and say that you want LME warrants from specific countries and they will go and find them for you.

And the great thing about copper contract, for example, is we have copper brands from all around the world. So, if you want US copper, if you want Chilean copper, if you want German copper, if you want Chinese copper, can get that on the LME? You may need to go and do some warrant exchanges and work with a member, but that’s a service that’s offered by the ecosystem.

When I look at it, yeah, critical minerals is changing, to some extent, global trade flows, and we are a global market, but we then have this value-add capability that our members can provide on sourcing from particular countries and I think we’re very much fit for the future on that aspect.

AH: All right. Okay. So, the next question was: as procurement focuses more on emissions, how are systems evolving to tie carbon metrics to refined product?

MC: Refined products can mean different things to different people. We operate at the smelter level, so if by refined you mean what comes out of the smelter, then the LMEpassport data applies directly to that metal.

If you go further downstream, say you go into a cable or wire or air conditioners or whatever it might be, then our vision is that that LMEpassport data can be an input into the emissions tracking and management systems of the fabricator and that they have one click they can connect to LMEpassport. They can suck in the emissions data for all of the metal that’s going into the furnace. And that’s an input to get to add to their total footprint.

The whole work around Scope 3, and supply change is really fascinating right now. And we think that LMEpassport is right at the center of that when it comes to understanding the footprint of your input metals.

AH: Yeah, I suspect the question was designed around that further down the supply chain, so it’s good to know you’re looking that far ahead and working that way.

Matt, obviously LME Week is coming up. It’s on our doorstep, the annual gathering of the global metals community in London. Just in your own words, what can we expect? What are the highlights?

MC: LME week, I always look forward to it, but in some ways it’s more the community than the LME itself. So, we obviously organize the seminar and then we have our dinner, which always a lot of fun. Talking about market modernization, for the first time we had a sort of a dinner entertainment, last year, we had Riverdance, which was extremely well received and, it’s very difficult to match that, but we do have a surprise entertainment, which I’m not allowed to reveal, but we’re very much looking forward to that and I hope everyone at dinner enjoys it.

I always think that the real value for me of LME Week is meeting everyone who uses our market. Indeed, those who don’t use our market and hearing their views. We’ve deliberately put out the white paper with a bit of notice so that people can start forming their views and I’m sure we’ll be hearing a lot of a lot of feedback during LME Week and really interested in that. I’m sure people will have views on a whole range of topics, and that’s always very valuable. We’ll be in listening mode to hear what people have to say.

AH: Yeah, well I am looking forward to it too – seeing everybody dressed up in their tuxedo penguin suits and formal dresses is always a little bit different from the day to day.

So Matt, thank you so much for today. We’ve run through some pretty technical aspects of the exchange and you have simplified it for us considerably. So, I have really enjoyed this. Thank you very much.

MC: I really appreciate the opportunity, great to catch up and see you in LME Week.

AH: Perfect.  And thanks also to you, our listeners, for tuning in today. If you liked what you heard and don’t want to miss any more episodes, go ahead and subscribe to Fast Forward on on Spotify, Apple Podcasts, Amazon Music and wherever you get your podcasts.

Tell us what you think in the comments and don’t forget to leave a review. And if you’re going to be in London for LME Week, the Fastmarkets team will be out in force, so please do come and say hello to us. Until next time.