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08 November 2017

Returning Optimism - LME Dinner 2017

Another LME dinner goes by. If not showing the level of irrational (with hindsight) exuberance of the 2005-07 period, when the press even started writing tales of excess,  the general sentiment this year seemed to me to be showing on the positive side of the ledger. And why would that be? Why, because of the potential soaraway demand for that new, exciting sub-group, the “battery metals”. 

Now I actually agree that the increasing importance of electric vehicles, and, probably more importantly, general power storage, are going to have a significant impact on global economics. Regular readers of this column will recognise that from the number of times I have written about it. However, I detected a degree of glib optimism about this development, perhaps an unwillingness to unpick the different strands of the argument. The kind of groupthink emanating from certain areas reminded me disturbingly of the period twenty years - or a bit less - ago, when the LME declared - maybe not publicly, in these words, but certainly in private conversations - it’s determination to become “the exchange of choice for the US auto industry”. Remember how it went? Securitisation was still all the rage (although the implosion of Enron was only a heartbeat away), US companies were trying to handle the accounting regulations that needed physical material and hedge to be the same product, and there was a lobby - mainly vocalised by one substantial player - which sung the siren song of a plastics contract. The result of that was that the LME decided to bring in geographically-specific aluminium alloy - which the auto companies used - and plastics - which they also used. Those of us who questioned both fragmenting contracts on a geographic basis and introducing plastics to a metal exchange were, apparently, living in the past. Well, securitisation using the new alloy was impossible, because there was no volume to facilitate it (and believe me, we tried) and plastics - effectively an oil-derivative product - failed to take off on the metal exchange. Good Heavens, who saw that coming??

In the search for new things, where lithium, nickel sulphate, cobalt sulphate and others are openly being touted as possible new LME contracts I detect a similar feeling. I could of course be totally wrong, and the next generation of LME traders could indeed be more occupied with the chemical than the metallic form of our elements. I do understand the difference between the two, and the different uses to which they are put. But I also know that the great success of the LME has been in the way it has wisely chosen the form of each metal to trade - changing them as technology develops, of course - and I worry that fragmentation of contracts, rather than helping industry, will create a confusing playing field. A simple underlying price and a premium/discount structure around that has worked well up until now. However, I am very happy to be convinced otherwise….

Aside from that, one of the other talking points of the week was the very large lawsuit between two major players. The numbers are eye-watering, but at least the legal profession will be rubbing its hands together with glee. Difficult to believe that hasn’t got a few years-worth in it.

Overall, though, it was just good to get back to an environment showing some positivity. It’s a long time since metals had their day in the sun, and the next one is probably overdue. For me, copper is the easiest beneficiary of the electrical revolution; not only do the vehicles use a lot more than the internal combustion equivalent, but it’s also difficult not to see copper benefiting in a big way from charging networks and power transmission. Also, unlike lithium, it’s easy to trade…… 

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