REVIEW OF 2011 - LORD COPPER: Chronicle of a broker’s death foretold

It’s that time of year again – the time to look back at what happened in 2011, and, maybe, try to understand.

It’s that time of year again – the time to look back at what happened in 2011, and, maybe, try to understand.

Back in January, my first column of 2011 was headed “Death of the metals broker”, and put forward my view that the structural changes in the market over the preceding period had made it very difficult for brokers to make money.

Well, here we are at the end of the year, and my final piece (before this summing-up) was talking about the demise of the broker MF Global.

What is interesting is that the death of MFG was attributed in large part by its own CEO to precisely what I was suggesting: it’s become nigh-on impossible to run a broker purely on the commission income it can generate.

My suggestion was to get out there and sell a multi-exchange trading platform, to try and generate economies of scale; the choice of the gurus of MFG was to expand proprietary trading, thus putting their corporate head deeper into the lion’s mouth of extreme market volatility. I still think I’m right on that one.

Slightly later in the year, I turned my gaze to the equity market, and seem to have got this one completely wrong. I suggested that the Glencore IPO would be a substantive success, and implied that it was surely a buy for any wise investor.

Well, we can all see what happened there; perhaps I’m not as smart as I think, and should have paid more heed to those people who confidently said it was a big trade, Glencore getting out at the top of the market. I seem to recall the editor of this magazine holding that view. I’m still a bit equivocal about it, but, looking at the share price right now, it’s hard to fault the logic.

I find myself with an inconsistent view: on the one hand, still believing the next big commodity price move must be downwards, and, on the other, remaining positive about Glencore. It must be the result of spending too many years watching them as the smartest players in the business.

I seem to have belaboured the banks twice this year, in February and again in April. Both times I was really looking at the same issue, namely, is there a difference between banking – as in taking deposits and lending, for example – and trading in securities, or even physical commodities.

I maintain that these activities should not be combined, and that the Glass Steagall Act was a remarkably sagacious piece of legislation; current UK and US government thinking appears to agree with me.

And, on a similar note, when will some of our more high-profile bankers – and we all know who they are – start tying remuneration to growth in genuine shareholder value, rather than just telling us it’s time to stop criticising them?

Glencore’s share price performance may have been disappointing; some of the banks’ is horrendous, but frankly they seem to have very little concern for their shareholders’ plight.

There have been a couple of LME – as opposed to broader metal market – issues that raised their heads this year. First of all, there was the question of whether the LME should build its own clearing house, in order to be able to offer a full package of straight-through trading and clearing to its users. The other one was the whole question of the use/abuse of the warehousing system as it strains under the weight of finance material.

On the clearing issue, my take was that one (possibly unintended) consequence of in-house clearing could well be to make the LME a more attractive package for potential buyers. Well, that may not be the reason, but that interest has certainly come out of the woodwork recently.

Incidentally, I have got more things to say about this subject, which should be appearing early in the new year. But for now, let me just say that although the full-package LME may look attractive, I’m pretty sure the same logic (top of the market, and so on) that was thrown at Glencore will be rehashed when it comes to bidding.

Obviously, if the LME is sold at the numbers being bandied around, there is a nice windfall profit for some members, which may colour their thinking. In the end, though, the influence of the big players will probably dominate the discussion. We know who took the MF Global shares – will they be in for a double bite with Credit Agricole, or will one of their rivals steal a march this time?

The whole warehousing issue is inextricably tied up with the buy-to-hold trade, ETFs and the concept of industrial metals as a store of value in their own right. I’m still in the camp that thinks this is an anomaly brought about by a particular confluence of factors in the economic cycle, and that it’s not going to last as long as some of the more aggressive promoters of the trade might be telling their investors; we shall see.

This trend is a continuation of what we saw last year as well, and I think one of the dangerous elements is the way in which cuts in production have almost been rendered a thing of the past; if the money is always there to take up the slack when consumers don’t have the demand for metal, then what we are doing is building up a surplus that will distort the market in the future. If there is one message to be drawn from 2011, this is it: ever-increasing stocks of metal predicated on low interest rates are going to create a horrendous bubble, with which it is in no way clear that the market will be able to cope.

What else was significant during the year? Well, I guess 2011 will be remembered for the way in which investment decisions – pretty much across all financial markets – have largely been reduced to a binary risk on/risk off decision. That’s a progression caused at least in part by the ever-faster speed at which information can be disseminated (and it’s worth pointing out that the short-term effect is the same, regardless of the accuracy or otherwise of such information) and the greater and easier access to trading markets brought about by straight-through electronic order execution.

So was 2011 a vintage year? Not really; difficult trading conditions, a succession of global economic problems (of which the eurozone crisis is probably the most concerning for us all) and the death of one of the most respected and active brokers on the LME.

I’m not privy to most people’s management P&Ls, but I suspect it’s been a tough year to make much money, which, after all, is why we all come in every day. So, in the hope of a clearer and more focused direction for the next year, I wish all readers a very merry Christmas and a prosperous 2012.

Lord Copper

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