LONDON (Reuters) - Welcome to Virtual London Metal Exchange (LME) Week. No lavish cocktail rounds, no black-tie dinner at the Grosvenor House Hotel, no after-parties and no hung-over breakfast meetings.
The great and the good of the global metals industry will this year definitely not be coming to London to indulge in what would be a mass breach of social distancing rules.
Virtual seminars will replace live events and zoom drinks the annual surfeit of free champagne.
It’s another physical COVID-19 blow for the 143-year old dame of industrial metals trading.
The LME’s trademark ring of red leather seats has been unoccupied since March 23, when the exchange suspended open outcry trading.
A disembodied LME Week starting on Monday echoes a disembodied trading floor.
The parties will surely return.
The ring? Probably, but it’s not a certainty.
Even if Europe’s last open outcry market does spring back into life, the exchange’s physical way of doing business is looking increasingly like a relic of the past.
The LME’s expansion into the world of steel trading is taking the form of standardised futures contracts with no option of physical delivery and therefore no need for physical trading of complex spreads. A tilt at the “green” aluminium market will be on an electronic spot trading platform.
This market’s future is looking ever more virtual.
The LME’s trading ring harks back to the market’s genesis in the Jerusalem coffee house of Victorian London. It’s the first time traders haven’t taken their seats since World War Two.
But the very nature of the ring, as the LME pointed out in a July notice to members, means “face-to-face contact (...) over prolonged periods and during which time voices are regularly raised”. Shouting at close proximity, in other words.
Social distancing rules will have to disappear before the ring returns. And the exchange’s nine ring-trading members will have to want to return.
Beyond the obvious health and safety conditions for a resumption of ring trading, the LME would require “that a meaningful number of Category 1 members are willing to return, and those members would need to collectively represent more than 60% of the total 2019 Ring-traded volume”.
Ring-trading has always been dependent on the willingness of so-called Category 1 members to bear the extra costs of having a physical trading team.
The rewards are direct participation in the setting of the LME’s official and closing prices, used as reference points by the physical supply chain, and being part of the core liquidity hub for trading the exchange’s labyrinthine time-spreads.
Those key LME reference prices are now being set electronically using a volume-weighted average price (VWAP) and spreads trading is continuing, seemingly without the need to make physical hand gestures and shout across a circular floor.
LME ring-dealers are getting a rebate on using the electronic trading system as compensation for loss of “floor business”.
The scheme, funded from the exchange’s enforcement fines, is capped and due to run only to the end of this year, although an extension looks inevitable.
The big question, however, is whether months of not having a ring have caused business models and indeed social models of working to evolve.
And the longer the market operates remotely, the harder the risk-reward questions posed of the last few ring-trading companies.
MOVING BEYOND PHYSICAL...
The LME ring trades the exchange’s physically-settled contracts, namely the six base metals and the two regional aluminium alloy products.
The exchange’s history of physical delivery is interwoven with its unique prompt date structure and the corresponding need for a human forum to handle the multiplicity of potential time-spreads.
These contracts still form the bedrock of the exchange’s turnover but a lengthening list of new products is coming in the form of index-linked futures contracts, cash-settled and easy-to-use with no need for the ring’s spreads expertise.
The test area has been steel, where the LME now has four liquid contracts and is planning to launch more.
The exchange tried a physically-settled steel billet contract in the past but it hasn’t traded since 2015.
The steel scrap and rebar vanilla futures contracts, by contrast, have been actively traded since they were launched five years ago. The two new hot-rolled contracts are both seeing exponential volume growth in their first full calendar year of trading.
Taiwanese and Indian steel scrap contracts are in the works, as the exchange taps into the macro currents of sustainability and a shift from global to regional supply chains.
Also coming is an aluminium used-beverage can contract for the North American market.
The LME will have to decide what to do with its existing aluminium alloy contracts. Physically settled in the same way as the traditional base metal contracts, both have this year experienced sharp drops in activity and a clear-out in exchange stocks.
Alloy is a “green” product, based on the remelt of secondary metal, and it could be another key component of the LME’s sustainability drive. The exchange plans to look again at its alloy offering, but whether the contracts can be revived in their current physically-delivered format is a moot point.
With its LMEPassport initiative, the Victorian dame of metals is fully embracing the 21st century with an electronic registry and spot metal trading platform due next year.
The move, born from the competing arguments over whether it should launch a full low-carbon primary aluminium contract, allows for the upload of supplemental information about any specific batch of metal, such as carbon footprint, recyclability or water management system.
Such transparency, it is hoped, will allow the market to price a “green” differential.
The exchange’s ability to offer such a portal bears witness to the fall of another historical bastion of physicality.
All LME-traded metal must be accompanied by a Certificate of Analysis, detailing metallic and producer specifications.
These certificates have historically been in the form of physical paper, liable to what the LME calls “document degradation” and you and I call coffee stains, “unnecessary duplication” or just getting lost in transit.
The LME decided it was high time to go electronic, a move that has enjoyed pan-industry support.
LMEPassport, it turns out, will also work just fine for any supplemental “green” accreditation that producers and traders may want to contribute to the potential spot pricing forum.
A move from paper to electronic registry of such important documentation was a no-brainer.
It remains to be seen if the remaining clutch of ring members come to a similar conclusion as the LME opens up ever more distance with its physical past.
Editing by Emelia Sithole-Matarise
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