London Metal Exchange: All change, no change?: Andy Home
LONDON (Reuters) - There was, in the end, no last-minute, knife-edge drama. The vote by the shareholders of the London Metal Exchange (LME) to sell the 135-year old Exchange to Hong Kong Exchanges and Clearing (HKEx) was overwhelming.
Only three shareholders, accounting for just 0.37 percent of the LME's stock, voted against.
They won't be officially identified but it's no big secret that opposition came primarily from the LME's industrial users. The likes of German copper producer Aurubis took a principled stand that the exchange shouldn't be sold, whatever the price.
For everyone else, including critically the biggest shareholders, the price tag, 1.38 billion sterling ($2.2 billion) was overwhelmingly persuasive.
Much higher than anyone expected when the LME initially invited bids, there was a collective sense among shareholders that they wouldn't seen anything like it again.
The deal, to quote Jim Coupland, LME board member and head of industrial metals at Standard Bank, sold itself.
It will be a good week for champagne sales in London.
END OF AN ERA?
Be prepared for a slew of headlines about the end of an era for the LME and, indeed, for London as a trading centre.
The sale of the Exchange to a Chinese entity is rich in symbolism, a symptom both of the UK's long-diminished manufacturing power and the inexorable migration of global trading towards the world's largest producer and consumer of industrial metals.
Yet the day after the deal closes, sometime in the fourth quarter of this year, it will be business as usual.
LME dealers will switch on their screens and trade the same arcane date system that baffles most outsiders.
Just before midday a group of them will meet at the LME building in Leadenhall Street to trade on the Ring, the Exchange's equally arcane form of open outcry trading.
The LME will be run by the same executive management team, based in London. It will be overseen by the same regulator, the UK's Financial Services Authority
The Exchange's drive towards self-clearing will continue. It has just announced the selection of Cinnober, the Swedish software house, as the core technology provider for its clearing house, LME Clear.
Remember it was the LME's decision to move into clearing, the unglamorous plumbing that underpins derivatives trading, that started the whole sale process in the first place.
If it is the end of an era, it will not be obvious on that first day.
That, of course, was one of the key attractions of the HKEx bid, the promise that it wouldn't mess with the LME's unique way of setting internationally-recognized pricing benchmarks for industrial metals.
That sense of continuity is symbolized by the preservation of the Ring, the vestigial link with the market's genesis in the Jerusalem Coffee House in the nineteenth century.
The Ring accounts for an ever-dwindling portion of outright LME trading. Most of that liquidity has shifted to the electronic Select platform.
It is, however, still the focal point for spreads trading, the adjustment of positions across the LME's daily prompt date system.
Fees on such trades are minimal to the point that many brokers are happy to absorb them.
The LME's own attempt to hike fees on short-dated spreads such as "tom-next" was defeated by customer opposition. [ID:nL5E8D87YT] HKEx has wisely decided to leave well alone...for now.
It will also leave alone the LME's warehousing system, core to the physical deliverability of the Exchange's contracts.
Most importantly, there will be no change to the changing ownership of LME-registered warehousing companies, many of which are now units of banks and trading companies.
That means the load-out queues for aluminum at locations such as Detroit and Vlissingen are not going to change either.
Nor will the cause of those queues, the ever-increasing financialisation of metals trading.
The traditional manufacturing base of LME trading is being increasingly marginalized by the influx of funds, particularly the black-box and high-frequency players that now roam the global financial landscape.
It is no coincidence that it was the LME's industrial users who put up the last stand to the sale.
For them it marks the culmination of a long-running diminution of influence on metals pricing.
Everything, of course, will end up changing. It's just a matter of time.
Mark the date well. January 1, 2015. That's when the stand-still agreement runs out. After that HKEx reserves the right to change everything, even the name of the LME.
Whether it does or not will depend on whether HKEx can monetize the 1.38 billion pounds it has just spent.
That the price tag includes an opportunity premium is not in doubt.
Just as the sale was a once-in-a-lifetime chance to cash out for LME shareholders, so too is the purchase a unique chance for HKEx to diversify into the world of commodities.
The question is how big a premium has been paid.
HKEx has laid out a multidimensional strategy to justify its eye-watering purchase price.
Increasing volumes by opening up the Chinese mainland, capturing the internationalization of the renminbi, launching new products such as steel contracts, accelerating the cash-generative LME Clear.
All are in the mix.
It is now up to HKEx to deliver. As chief executive Charles Li told analysts at the time the deal was announced, "buying it is easy but making it work is challenging."
Just how challenging remains to be seen.
The core of the growth strategy centers on HKEx's promise to deliver China.
And key to opening up the Chinese metals sector to LME pricing will be its ability to persuade Beijing to allow the opening of LME warehouses in the country.
Beijing's stance on the issue is thought to have recently softened but Hong Kong will still be lobbying against Shanghai, the current benchmarker of domestic metals pricing.
China is not monolithic and HKEx success is not guaranteed.
The degree of eventual change, particularly on fees, will depend on how the envisaged multiple revenue stream growth pans out.
It will, however, also depend on something else which has been almost entirely overlooked in this whole process.
Existing volume growth, and by consequence revenue growth, has been taken for granted.
LME volumes grew by an average 12.1 percent over the 2007-2011 period. Even in 2009, the year of the Great Manufacturing Contraction, volumes dipped by only a marginal 1.13 percent.
In its analysts presentation back in June, HKEx noted that LME "volume growth has shown significant resilience during a period of challenging global conditions".
But recession does not automatically lead to lower trading volumes. Quite the opposite in fact, given the deluge of surplus metal into LME warehouses and the resulting need to finance it.
Prolonged recession, however, is another thing, particularly when it is accompanied by reduced investment interest in industrial metals. It was just such a combination that caused the last sustained drop in LME trading over the 2000-2002 period.
Could the same happen again?
There are some ominous signs, from the current slowdown in global manufacturing activity to low levels of price volatility across the metals complex and the broader flow of investment money out of commodities.
A collective loss of risk appetite by the much-maligned fund community is one change HKEx will not be looking for.
(Editing by William Hardy)
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