The ‘Dog Days’ of summer are traditionally the period of sultry weather experienced in Europe in July and August. Originally a Roman concept, and so named because they coincided with the time when Sirius - the Dog Star - rose at the same time as the sun (no longer the case, because of the progression of equinoxes), the phrase was repeated in the Book of Common Prayer, and covers the second half of July and most of August. Incidentally, the Romans used to sacrifice a red dog, so owners of Irish setters beware. Anyway, in both traditions, it’s a period of lassitude, when not much happens in the sultry weather; summer holiday time, effectively, in the modern European world.
Activity by the LME
Well, that may be generally the case, but it doesn’t seem to have affected the LME, which has given us lots to think about, even as the market has indeed succumbed to the lassitude - at least in terms of significant price moves - of the dog days. Actually, when I say LME, I probably mean HKEx/LME.
First, we’ve had the announcement that they are to appoint a Head of Sales. Now, I’ve written about that in more detail elsewhere (in Metal Bulletin, http://bitly.com/1rWh0b6) so I won’t rehash that discussion here. It is, though, it seems to me, a significant step in the development of the relationship between the Exchange, its members and its end-users (clients of the members). It may be that this is no more than an extension of the normal dialogue, but it also suggests the potential for direct sales, which is something the members may have thoughts about.
Next, we’ve learned that HKEx/LME have signed a memorandum of understanding with China Construction Bank to cover “cooperation in the development of new products, joint publicity and marketing, and other areas”. Well, that’s an interesting concept, but not necessarily terribly clear. I do recall that it’s not many years ago that CCB were considering LME trading membership - presumably that’s been shelved now, as it would hardly be compatible with the MOU; that wouldn’t be a level playing field between supposedly equally-treated members. That aside, though, this seems to be part of the determination of HKEx - expressed at the time of the take-over - to increase awareness and use of the LME by Chinese investors (both trade and speculative). Indeed, CCB talked of a ‘financial fast track’ to help Chinese trade players (miners, smelters and the like) to gain access to international markets. I actually hesitate to say too much at this stage, because the details of the agreement and its purpose are not yet fully clear, but again, I suspect that the brokers, all of whom are as far as I am aware keen to take a slice of the new Chinese business HKEx talked of attracting at the time of the take-over, may well be watching this development with a great deal of interest. It has a slightly odd ring to it.
Then there’s the other announcement, still to come, so not really dog days, unless you count the current unseasonably warm September in there, of the new costs of trading, as the LME publishes its latest fees towards the end of this month. Those are going to increase, and possibly quite substantially, although the Exchange may choose to phase them in rather than go for one hit. After all, there’s not only the £1.38billion price tag that needs to produce a return, there’s also expensive legal action and LME Clear to pay for. Members know what’s coming, but that doesn’t mean it won’t be a jolt.
A Common Thread
Now, I think one can see a common thread running through all this. The business model has changed. The old one didn’t really require the LME to show much as a profit - it was member-owned, and the benefit generated from the business that flowed through the market went to the members who transacted that business. But with the advent of a commercial ownership, profit is required to be generated by the Exchange for its shareholders. If everything stayed the same, therefore, the total profit generated would have to be divided differently, with some of the members’ share going to the Exchange. That’s not what is going to happen, of course; the whole intention is to generate more, to enable the members to survive and prosper, while the Exchange does the same. In an ideal world, that’s how it will be; more business creating more opportunities for everyone. But that takes time - and the first two items I’ve mentioned here won’t begin to have an effect for a while, until the new structure is well bedded-down. Until then, more will have to be squeezed out of the members - hence the fact that the fee rise will be more than nominal.
It’s not clear yet how this will all pan out, but I have my suspicions. One thing that is clear, though, is that the Exchange does need to see its members prosper - but it now has non-member shareholders as well, whose interests it also has to protect. I think these announcements in the dog days of 2014 are giving us a clue as to what kind of changes we should probably be expecting as the Exchange seeks to further those multiple interests.