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11 August 2021

Keep it simple


The Victorians (as in nineteenth-century British, not inhabitants of the Australian state) have a reputation for being repressed, buttoned-up, overly mannered and deeply class aware; most of that is probably justified, but there is another side as well. Their engineers and scientists were responsible for massive advancement of society and technology. Brunel (just as an aside, in my view an absolute shoe-in for the fourth plinth in Trafalgar Square, rather than the ‘inspirational’ pieces that nobody gives a second glance to) stands head and shoulders above them all - not literally, of course, since he was no more than five feet tall - with his record of screw-driven ships, the Clifton suspension bridge, railways - but there were others as well. Bazalgette, for example, who cured the stench of London with his underground sewage system, still very much the heart of London’s drainage today. (If only subsequent generations had been as diligent in the maintenance as he was in the original construction……..)  

Closer to home, for the metals business, titans of the trading world like Rudolf Wolff, Charles Davis, Henry Bath and the rest, got together to found the London Metal Exchange. As we know, that institution also survives today, still the centre of metal price discovery, after approaching a hundred and fifty years - so they obviously got something right.

What was it? 

Well, being in the right place at the right time clearly helped. London, with its Imperial connections, its wealth and its status as the powerhouse of the industrial revolution, was at the centre of global trade and industrial production, so it sat right at the heart of the business the LME was established to serve. 

Something else I would argue that was critical, and has remained so, is that they kept it simple. And to return to those Victorian engineers for a moment, so did they. Digging tunnels may a very precise operation, but Bazalgette’s concept is a simple one. If you don’t want sewage washing down the streets, then the best thing to do is dig tunnels under them. Plenty of people told Brunel that the SS Great Britain was too big, that her sheer weight would mean that she could never carry enough coal to power the engines to cover the voyages for which she was intended. But Brunel had already worked out that while the water resistance to the passage of a vessel increases by the square of the increase in size, the carrying capacity increases by the cube of that same size change - so basically, by making it larger, he made the ship more efficient. Simple, when you know how.

So the LME founders and their successors for many, many years kept it simple: what they made available to trade on the Exchange were refined primary metals, in widely consumed shapes and in the most commonly used chemical and mechanical specification. Yes, of course, there were changes along the way - cathodes for wirebars, SHG zinc for GOB, aluminium flirted with 99.5 and 99.7% purity, for example. But still, always primary refined non-ferrous metal, and the physical market left to determine brand and location premia.

Things have started to change, though. First, there was the pressure on the LME to become the hedging market of choice for the automotive industry. That spawned the aluminium alloy contracts, and the plastics ones. Alloys are still with us, with varying success, but plastics - fortunately - finally bit the dust a few years ago, after being notably unsuccessful. Somebody must have forgotten what the M in LME stands for, and also ignored the fact that plastics are a lot closer to oil than they are to metals. Still, we shouldn’t criticise people for trying new things; as long as they accept it when they don’t work.

A couple of weeks ago, Martin Hayes wrote here welcoming the latest clutch of new contracts - and they are anything but simple, refined primary metals. Regional premia, various regional scraps, local hot-rolled coil and lithium hydroxide. I hope they succeed, because of course I wish the LME well. But, to be honest, I’m not holding my breath, not least for the chemical lithium product. Yes, being the exchange of choice for battery makers is a fine aim - and, let’s be clear, the LME does have a head start in this, since battery makers have been using it for ages. 

Yet I don’t think I’m just harking back to the past, but I do admire the simplicity and clarity of purpose those old Victorian founders had, in just the same way that I admire the purity of Brunel’s vision. So I’m afraid from me it’s a very cautious welcome to such new products………  

  

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