This article was written by Martin Hayes. All views and opinions expressed are strictly his own.
The UK General Election earlier this year saw a new Government elected around the premise of ‘Change’, which was underlined at their recent conference by the tagline ‘Change Begins’.
This week – nearer to home – the annual LME Dinner Week kicked off, centred around, as usual, the Tuesday evening Dinner and some 2,300 attendees, which is still the prime face-to-face event for the global metals industry to do business, share views and compare and gather insights into price direction and prospects.
For producers, end-users, traders and regulators to some extent, the week is also a key melting-pot into gauging the future for the world’s mining, extraction, refining, and trading sectors, and the role of the LME itself in that process.
It is important to accept that the LME has constantly changed over the years and indeed decades. Sometimes that change is measured and incremental, while at other times it is a more significant evolution forced reactively by the various crises that have engulfed the exchange – tin, copper, and most recently nickel.
However, perhaps the common theme stretching back over the last three decades is the ever-increasing role of the LME in instituting wider change outside just the actual marketplace, taking a broader view of how the industry operates, amid the focus now on climate and environmental shifts.
Historically, and for many years, the Exchange provided the ‘playing field’ and some rules and regulations – trading times, acceptable deliverable brands, warehouses to store LME-recognised metal and so on.
Generally, this allowed the LME Membership and their customers to just get on with it and do business. But that model no longer applies in a world that is de-carbonising and shifting towards cleaner energy, sustainability, recycling and ethical responsibility.
It is almost like how playing a football match, to use an analogy, has developed from providing the pitch, three officials and a match ball for two teams to kick around. Now, there are technological additions, such as goal-line sensors, VAR, many more officials, and a multitude of balls for what is basically the same game as in the last century.
For the LME in 2024, it is no longer just the case of merely authorising metal for delivery – it now involves incorporating requirements like environmental responsibility and ethical sourcing into its rules. In essence, the LME is becoming much more pro-active, and attempting to set the agenda, rather than just react.
For example, the Exchange’s most-recent sustainability discussion paper resulted in this week’s decision to implement the EU’s CBAM (carbon border adjustment mechanism) requirements. Stripping away the jargon this is making emissions data more transparent for all.
Similarly, there will inevitably be a shift in how the contracts are traded emanating from another LME White Paper on boosting its liquidity, amid growing competition from other global exchanges.
Ring volumes as a percentage of total LME turnovers have increasingly declined this century to probably under five percent, as Select, the Exchange’s electronic platform, has become more adept and efficient in both price-setting and offering the ability to transact the myriad individual dates and spreads.
But surprisingly, and in marked contrast to all other global futures marketplaces, Select, which launched in 2001, accounts for just 48 percent of turnovers – other comparative exchanges are over 90 percent traded on screen.
This means that perhaps half of LME traded metals change hands in the negotiable inter-office market, which is more informal, less immediately transparent and where the bulk of the interest may well be from the industry, as opposed to financial investors.
So, the paper on enhancing liquidity on the electronic platform contains technical proposals on ‘block trades’ designed to move more business to the screen, appealing much more to the investment fraternity, which does not really have any desire to get involved in the LME’s still-unique daily prompts structure.
Of course, no LME Dinner week would not be the same without some attention on Members, both ring and non-ring – a new Category Five entrant was welcomed by CEO Matthew Chamberlain in his speech on Tuesday.
But, more inevitably, the focus was on ring-dealer numbers, now down to seven after September’s withdrawal of Societe Generale, approaching critical mass where the future of the world’s last true open-outcry venue is concerned.
The floor would close if the number of members falls below six, or trading volumes drop below 75 percent of the previous years level. That is currently not the case, and indeed Bloomberg recently reported that US-based financial firm Clear Street is eyeing ring dealer status. However, whether this is swimming against the tide remains to be seen.
As the LME evolves – and many of these changes put the Exchange in pole position with a variety of metals that are the global future for everyday life, amid climate change as coal, oil and gas decline – more than a few traditional feathers will be ruffled.
But for another guide to the future for the industrial minerals sector, look around Park Lane and the Grosvenor House on Tuesday. This showed an industry and market that is even more diverse and not so old in years.
Where change is concerned, it’s worth remembering that the young have the least interest in the past and the greatest interest in the future. So, the LME will almost certainly look and feel different by the end of the decade.
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