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No country for old metal men

Old metal men have been shaking their heads and lachrymating Olympically into their beers at confirmation of the sale of the London Metal Exchange (LME) for £1.4 billion (US$2.2 billion) last month – and I am proud to be one of them.

And yet the worst that proponents of the LME sale can throw at us naysayers is that we are unrealistic and nostalgic and should move with the times. As a sop to us old fogeys, the new management is even considering keeping ‘open outcry’ trading!

So let me make clear that my opposition to the sale of the LME has nothing to do with nostalgia. In fact I would gladly get rid of open outcry if I could be sure that the discovery of prices was free and fair and could be trusted from London to Liaoning.

However, I fear it is not what comes out of the mouths of dealers, but what is going on in the engine room that matters. Whether it has any chance of improvement under Chinese government-owned leadership remains to be seen.

My own sanguine view is that nothing can save the LME now. Its members and stewards have made their choice. The LME will remain primarily the conduit for quantitatively eased money, algorithmic trades, derivatives, exchange-traded funds (ETFs) and hedge funds.

Its income will be derived from volume trading and its warehousing system will be prostituted for the storage of dead metal held on warrant by ring-dealing traders and banks who also own the warehouses in which metal is stored.

Their income will be derived from rent, fund-management fees, carries that exceed the present low interest rates, and the premia exacted for prompt delivery.

We cannot expect the Financial Services Authority or the Office of Fair trading of the UK to intervene because these matters have been brought to their attention, and they have already chosen not to.

But, perhaps there is another way, and my prediction is that C Steinweg-Handelsveem BV of The Netherlands, which has 23% of LME-approved warehouse space and is the only warehouse group with world coverage not yet colonised by a trading house or bank, will, ultimately, reverse into a new exchange.

A new LME will be formed, to be re-populated with physical metal merchants, mining houses, brokers and industrials, consumers and producers, who will value the prompt delivery and re-delivery that good warehousemen perform; as well as the true price discovery brought about by the equilibrium of purchases and sales, a renaissance of the perfectly formed system built up over the last century that saw the value of ‘in transit’, ‘un-encumbered storage’ and free flow of metal as a pre-requisite for the discovery of price.

Out of the ashes, or, should I say, the by-product slag and fugitive emissions, of the sale of the LME to Hong Kong Exchanges & Clearing (HKEx), will emerge a rival London exchange reverting to the old model where warehousemen were warehousemen and merchants, banks, producers and miners were just that.

I look forward to that day and I imagine that out there the manoeuvring for such an outcome is well under way.

For me, I do not agree that the past was a different country. The LME past was peopled with as many flawed human judgments as today, but never before did it matter much to anyone beyond the metal community.

Today, with commodities at the base of our financial system as a refuge against paper, it has never been more important that those values should be inviolably correct.

The cost of skewed prices for us all is the potential for false values on equities markets, which in turn expose pension funds to incorrect valuations, and in turn expose large companies to poor investment decisions based on false data.

‘It is just the LME’, I know, ‘why should I be so upset?’ Well, I am sad for the City of London, and those the world over, who once had a belief in it as a bastion of fair play. I would hope that one day that will be restored.

Anthony Lipmann

Published – Mining Journal- 17.08.12