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10 June 2013

A valedictory for Martin Abbott

It is not really that surprising that Martin Abbott has decided to resign his position at the London Metal Exchange, with effect from the end of the year.

He was, after all, a genuine ceo, naturally reporting to his board, but with the ability to set an agenda.

In the bigger HKEx environment, responsibility for the LME is of more of a divisional nature, with layers of management above.

If one is being honest, it is probably also correct to reflect on the value of the share option package created by the sale of the Exchange. The motivation is probably not that difficult to understand.

Martin took the ceo job as the early 21st century boom in commodities was already underway. LME volumes were growing healthily and electronic trading, which had been pioneered by others, was being dragged back to the LME by the (then clearly imperfect) Select system.

The question of whether or not electronic algorithmic trading is a good or a bad thing for the world of non-ferrous metals is one I have raised numerous times in this column, but the reality – and this was seen with remarkable clarity by Martin – was that there was an enormous latent volume of business available for the LME once the systems were reliable.

Obviously, the technical wizards played a large part, but it was Martin Abbott who grasped the responsibility of ensuring that not only Select, but also the matching system and electronic warrant depositary were developed to give sufficient robustness to be acceptable to the financial institutions wanting to use them.

The success of those steps is reflected in the ongoing upward trajectory of LME volumes.

Along the way, the plastics contract – that strange animal for a metal exchange, born from special pleading – was ditched, and in its place came the new steel, cobalt and moly contracts.

They are all a bit ho-hum, but trying new things is broadly counted on the positive side of the ledger, as long as they are metal.

There remains some work to do with regard to contract rationalisation, however, as shown by the three different contracts for aluminium.

Contentious issues

The two most contentious issues of Martin’s term of office are almost certainly the sale of the market and the state of the warehousing system.

To look first at the sale, the implications for members are somewhat mixed, but once a purchase approach had squeezed the toothpaste out of the tube, it became inevitable that the Exchange would change hands.

Martin and his colleagues succeeded in presenting the attractions of the LME so successfully and with such aplomb, that they achieved what I am not alone in thinking was a truly remarkable price.

That the sale will fundamentally change members’ relationship with the Exchange is not really the point here – they found themselves in a position to make a decision on favourable terms, and that came as a result of Martin Abbott’s efforts.

Warehousing is a less happy picture. Something does not seem to be working properly, but it is important to put that into context.

The LME has a set of rules for its approved warehouses and there has been speculation from several quarters that those rules have been broken. Quite correctly, the LME has consistently pointed out that this is not the case.

The issues with warehousing and the appearance of ridiculously long queues were produced by a particular set of economic circumstances, which were themselves the products of governmental policy since the financial crisis of 2007-08.

As long as cheap money is pumped into the bank and trader behemoths, they will recycle some of that money into the profitable – and very low risk – metal warehouse trade.

The LME cannot change the way governments choose to work; it is an unfortunate side effect of central bank money creation that the LME is experiencing warehouse queues.

They will ease as the economic cycle moves on. Meanwhile, the small changes in load-out rates and so on that the LME has effected are probably the maximum they can do to ease the situation at all.

Conclusion

So after what was out of necessity a short survey of a term of office, what should we conclude?

The Exchange is in a robust state and has been able to benefit mightily from the global desire for commodity investment over recent years. It now has a financially sound parent and that, in conjunction with the in-house clearing system which is under development, means it can look forward with some confidence to the future.

That is a very sound legacy for a ceo to leave, and Martin’s term in office has represented an impressive piece of navigation through some fairly choppy waters.

Members should thank him for his efforts – and for the wad of cash that brought an extra sparkle to many of their Christmases in 2012 – and wish him well for his future projects.

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