Everyone loves a bull market. Expect a sunny mood at London Metal Exchange Week, the annual global metals industry gathering, even if the city's weather next week doesn't oblige with actual sunshine. The LME price index for six base metals has risen by 24 percent so far this year with aluminium and zinc bubbling up to multi-year highs.
A rare period of synchronized global growth has kept demand buoyant, while multiple supply chains have been affected by China's war on smog. The future looks even brighter thanks to the electric vehicle revolution with its promise of a whole new source of metallic demand.
The tight-knit LME community is itself a sunnier place after new chief executive Matt Chamberlain reset an increasingly fractious relationship with a market-wide discussion on how to reverse the leakage of volumes to other exchanges and the over-the-counter (OTC) shadows. The result was the "LME's Strategic Pathway", a multi-dimensional balancing act between keeping the distinctive quirks of this venerable 140-year old institution whilst making it more competitive in a fast-changing metals trading world.
And, miracle of miracles, even LME volumes have taken a dramatic turn for the better over the last three months. Which should put a smile on the faces of exchange and brokers alike. This being the LME, however, controversy is never far away. And this year, for the second year running, it comes courtesy of Michael Farmer, a member of Britain's House of Lords, and, in market lore, lord of the copper market.
After a blistering attack on the LME's strategy as guest speaker at last year's gala dinner, his Red Kite group of funds has just sued Barclays for $850 million over copper trading losses. But first the good news. Average daily volumes on the LME surged by 37 percent in September, marking the third consecutive month of year-on-year growth after two and a half years of decline.
The scale of increase may flatter to deceive. There were some sharp shifts in trading flows this time last year resulting from the exchange's much-criticised attempts to attract new players. But the trend is more convincing. Cumulative volumes have crept back into positive growth territory after falling consistently since the start of 2015.
And that's even before the cut in short-dated trading fees, a core part of the LME's "Strategic Pathway", which kicked in at the start of October. Bull markets may be doing the LME's work for it. It's noticeable that the three contracts now showing positive year-on-year growth are zinc, nickel and aluminium, all of which have seen heightened speculative interest.
It was always tricky separating out the drivers of falling volumes. Was it the fee hikes? Was it the broader downturn in prices? It may prove just as tricky doing so as volumes start growing again. But the LME's generous give-away on fees is, remember, conditional on volumes returning, particularly on the short-dated spreads. The grace period is twelve months and counting.
It will help if the exchange can claw back lost revenue by closing the incentives for LME trades to migrate to the OTC market. That's work in progress but will be key to appeasing Hong Kong Exchanges and Clearing, which is understandably still keen to recoup its 1.388-billion pound investment in the LME.
Along with the OTC fee will come a torrent of micro changes aimed at reinvigorating the exchange's defences against existing rivals such as CME and potential new ones such as NFEx, currently waiting in the wings ahead of a 2018 launch. Some contracts, such as aluminium alloy and molybdenum, are going to be revamped.
Trading in aluminium alloy appears to be in terminal decline, tumbling another 49 percent this year, while molybdenum has been inactive since the middle of last year. The latter is likely to be resurrected as a cash-settled monthly contract and this non-traditional LME format seems set to be the template for other proposed offerings.
On the potential launch list are aluminium premiums, alumina and, with one eye on the green technology revolution, cobalt sulphate, used in lithium-ion batteries. The LME's two existing cash-settled products, steel scrap and steel rebar, have both experienced strong growth so far this year. A third steel contract for hot rolled coil is surely not too far away.
Then there is the LME's foray into the bullion market, itself undergoing a period of rapid change. The gold and silver contracts, a hybrid of old and new LME trading formats, have seen volumes steadily build since the launch of LMEprecious in July.
All of which should guarantee a feel-good mood at Tuesday's gala dinner after last year's simmering tensions. Perhaps still bruised by Farmer's fiery performance, the LME has this year opted for a non-industry guest speaker, British broadcaster and journalist Andrew Neil. If nothing else, the choice will add spice to the betting on the length of the guest speech, an age-old LME dinner tradition.
Farmer's shadow, however, will hang over this year's events just as much as it did last year. The cocktail parties of LME Week 2010 were buzzing with speculation about the size of positioning on the copper market, which was then on a bull charge to the $10,000 level.
Now we know that Red Kite was a key protagonist at that time. Its spread position, short December 2010 and long December 2013, is at the core of the multiple allegations of wrongdoing made against Barclays and its metals trading team. Barclays has denied all the charges in a court filing and the earliest the case could make it to trial, assuming it even gets that far, is June 2019.
But Red Kite's legal salvo cuts to the heart of the LME, quite literally in terms of Barclay's then trading operations on the ring, the exchange's totemic open outcry system. The case resurrects old arguments about the way the closing prices are set and whether LME members should have dual capacity to trade both for themselves and for their clients.
Farmer's rallying cry at last year's dinner galvanised the LME traditionalists and, with hindsight, pre-empted the exchange's recommitment to its core users. Red Kite's suit against Barclays, however, now poses some hard questions about those very same quirky LME traditions, guaranteeing it will be the hot, albeit unofficial, talking point of this year's LME Week.
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