Why did it go wrong?
The tribulations of the LME nickel market continue to make the general press, so I thought it apposite to make a couple more observations about where this fiasco has left the LME, and perhaps think a little about why it finds itself effectively on the naughty step.
As I said in my opening sentence last week, it used to be so simple; the LME was a member-owned marketplace, where those who wanted – and had paid up their membership fees and conformed to the basic requirements of membership – could go and make their purchases and sales. The link between the world of physical metal trading and LME forwards was close – indeed, the two parts of the global metal trade represented by those two strands were joined at the hip. The LME, on its creation and in its beginnings, was an integral part of how the business functioned. Nobody saw it as a profit-centre in its own right – it was there to enable business to take place in an environment of known parameters. The idea that owning and operating an exchange could be in itself a way to make a lot of money didn’t even occur to LME users for most of the hundred and forty-odd years of its existence.
But times move on, and we all need to keep up with them. So some began casting their eyes over other exchanges, futures not forwards, mainly, and saw that they did indeed generate profits for their shareholders. So why not the LME? It could become a “for-profit” organisation, not just the members’ club some began to portray it as.
Now, it would be disingenuous to suggest that any board of directors could reasonably have rejected the bid for the LME when it came. The price was so…….well, let’s just say it was right at the top end of rational expectations, and boards have to consider the interests of their shareholders. That one-off capital gain – particularly for the smaller members – was manna from heaven. But the result was to speed the rate at which the LME was moving away from its traditional market, that of the global non-ferrous business.
The newly-minted “for-profit’ entity had to make money, to keep its shareholders happy in turn. That meant attracting new players, introducing rafts of new contracts (most of them more attractive as speculative playthings than hedging tools) and diluting the interests of the mining, processing and trading backbone of the business. And of course big banks – who had already for some years seen the possibilities of trading commodities rather than financing the trading of them – loved it.
So was the sale of the LME responsible for the mess the nickel market became two weeks ago? No, of course not. But it played its part in blurring the clear understanding – grown over years – of the LME as part of the metal business. Are the members better off? Well, I don’t mean financially – I can’t comment on levels of reward – but in terms of their place in the business? I would argue not, because it is another entity now which controls what they previously owned as their marketplace; and that entity is the one that decides when to cancel contracts.
Is there a way forward, out of the mess? I’m sure there is, but I don’t know what it is – after all, I’m just a former trader, from the way it used to be; maybe I just look at the past through rose-tinted spectacles?
I fear, though, as I said last week, that the law-suits are being prepared, even now.