The creeping revolution in industrial metals trading

The way in which industrial metals are priced is starting to change.
Whereas once there was a single forum for trading metals such as aluminium, lead and zinc, there are now three.
The London Metal Exchange (LME) has long dominated global pricing, its benchmarks hard-wired into much of the world's physical trade.
The last year, however, has seen LME prices sway to the increased gravitational pull of China's Shanghai Futures Exchange (ShFE).
In the United States, meanwhile, CME Group has launched five industrial metal contracts over the last 12 months as it seeks to challenge the LME's global franchise.
To some extent this is a phoney war. The LME has just experienced a second year of falling volumes but is not going to lose its metallic trading crown any time soon.
However, the fracturing of metals pricing from a unipolar to a multipolar model is starting to alter price formation at a structural level in some markets, while the sense of heightened competition is pushing the LME itself into opening up whole new markets for exchange pricing.
If volumes were the only metric, the LME's historic role as global base metals price-setter would seem to be troubled.
Total activity on the London exchange fell by 7.7 percent last year, the second consecutive year of declining volumes.
All major contracts experienced lower volumes ranging from the marginal in the case of nickel to the catastrophic in the case of molybdenum, which lapsed into disuse around the middle of the year.
Flat, bearish markets were one factor in last year's contraction. It's noticeable that the only month in which LME volumes increased year-on-year was November, when copper staged a massive upside break-out from its trading range.
But somewhere in the mix is the thorny issue of trading fees, hiked at the start of 2015 and readjusted downwards in August last year.
The exchange's part-reversal of the increases on short-dated carries may have been a case of too little, too late since volumes have failed to respond in any appreciable way.
Take that least glamorous of metals, lead. LME lead volumes fell 16 percent last year after slipping by 1 percent in 2015. Core to that decline has been the drop-off in trading of "tom-next", the shortest-dated carry of them all, which has seen volumes slump by 31 percent over the two-year period.
All of which is in stark contrast to what has been happening in Shanghai, where trading in the ShFE lead contract more than tripled last year with consecutive records hit in November and December.
It is tempting to view this tale of two lead-trading cities as a head-to-head battle for global pricing supremacy.
But it is not. There is no evidence whatsoever that the industrial supply chain is changing its pricing basis from LME to ShFE.
Rather lead seems to have made it onto the radar of the investment crowd that ran amok across all China's domestic commodity exchanges last year.
ShFE remains first and foremost a domestic market, protected from outside influence by its own membership rules and the great capital wall that still largely seals China from the rest of the world.
That is not to say ShFE prices don't influence LME prices through arbitrage and sentiment, but those who have stopped trading LME short-dated carries have not decamped to Shanghai.
Nor have they switched to the CME's lead contract, which has notched up just 25 lots since its launch in June and none whatsoever in the fourth quarter of 2016.
Trading of industrial metals, in other words, is not a zero-sum game but rather one of two, or potentially three, parallel evolutions.
Things, however, start to look a bit different when you consider what's happening in the world of aluminium trading.
As with lead, there is no obvious direct linkage between the 10 percent decline in LME volumes and the near-doubling of ShFE volumes.