LME to keep trading ring open

The London Metal Exchange (LME) has announced that, following the results of a consultation period with its members, LME Official Prices (used as a contract benchmark) will be established in its London trading ring while Closing Prices (used to calculate margins by some users) will continue to be determined electronically.

The LME states, “This optimal structure caters for both smaller physical customers – who use Official Prices in their contracts and overall prefer these to be determined in the ring – as well as financial and larger physical users, who focus primarily on Closing Prices and generally favor electronically derived pricing.”

The LME consultation on a split pricing approach was launched in June following a discussion paper issued on the LME’s market structure, which included the decision to determine Closing Prices electronically on a permanent basis. The LME says it received 12 consultation responses, mostly from what it calls Category 1 ring-dealing members, that “showed broad support for the specific proposal of determining Official Prices in the ring” once COVID-19 restrictions are lifted.

“While fully acknowledging that many Category 1 members would have preferred Closing Prices to also return to ring-based price discovery, we’re pleased with the level of support shown for maintaining Official Prices in the Ring and look forward to welcoming members’ ring teams back in September,” states Matthew Chamberlain, LME CEO.

Chamberlain adds, “We believe this split pricing model is the best outcome for the market as a whole, allowing increased participation and transparency in the Closing Price process while enabling different user groups to access and take part in pricing in the way that best suits their business.”

One day after the LME’s Aug. 9 announcement, Reuters reported the Triland Metals subsidiary of Japan-based Mitsubishi would be ending its presence in the LME ring. That would leave just eight metals industry companies participating in ring trading, under a charter that states if the number of participants drops to six, telectronic methods may be used for all types of pricing.

The reopening of the ring in September will be welcomed in the short term by some traders, but a sense of the inevitability of electronic pricing also is a prevailing sentiment. “This is a kind of compromise,” states one trader of scrap exported from Europe, referring to the electronic-only option originally proposed by the LME.

He continues, “However, it does appear to indicate the eventual outcome will be the end of the ring, with one ring trader having already dropped out voluntarily.”

John Browning, who is based in Shanghai with BANDS Financial, wrote in June of this year, “I fear that the ring will open in September, but its foundations will have crumbled by Christmas. It is not wishful thinking that will keep the LME ring open, but that there is a profit creating rationale for its participants, and at the moment that is by no means clear.”

In his Aug. 11 email to clients, Browning adds relative to the Triland announcement, “No doubt the management at Triland has made a sober assessment of the profit creating rationale for its continued participation in the ring and found it wanting. However, the same calculation is available to the remaining eight, and the LME is no doubt taking the temperature as to their continued participation.”

The Brussels-based Bureau of International Recycling (BIR) hosted an online session with the LME’s Chamberlain in March of this year, and at that time the metals trading BIR members who participated expressed concern about the outsized influence of fund managers and speculators in an electronic-only pricing system.

Five months, later, the metals trader contacted by Recycling Today repeats the same sentiment, saying electronic pricing only “will lead to less trade influence on prices that are used to ‘price’ physical trades, and the market will be more influenced by algorithmic traders—not fundamentals—until the algorithmic traders move on to the next market to manipulate.”

Commodity exchange services around the world have moved to electronic pricing methods to attract more business from financial institutions and funds, with the LME seemingly being the last to maintain a trading floor for physical metal buyers and sellers.

If the LME ring winds down in late 2021 as predicted by Browning and feared by the trader, “I believe it will level the playing field for LME competitors, as the LME won’t be able to claim a differentiation from them,” states the trader.