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No one can save the LME now

By the time you read this, it will be too late. Today members of the LME vote on whether to accept the $2.14 bln bid put forward by the Chinese government-owned exchange HKEx for their platform.

So it is that this key building block of the City of London, founded in 1877, will pass into history with CEO, Martin Abbott, and Chairman, Sir Brian Bender, playing the roles of Rosencrantz and Guildenstern in this gravediggers scene – alas, poor LME.

Where did it all go wrong?

Some would say that the seeds of destruction date from Big Bang in 1986, the moment when de-regulation meant that banks were for the first time allowed, in an act of financial transvestitism, to get involved with the metal markets. Up until that time, the ring was populated solely by what today would be regarded as – but never were – boring old metals trading companies and metal brokers – companies with tangible connections to some part of the physical metals trade.

A quick look at the member list from one of the market’s heydays in 1960s illustrates this point perfectly. There were 28 ‘ring-dealing’ members (nowadays, for some unknown reason, called ‘Category 1’) and, of those, fifty per cent of them were family-founded businesses. And of those, the majority contained active and intelligent family members whose name was over the door, like Dewhurst the Butchers, as a sign of the trust that could be placed in them – they would no more sell you bad metal or provide poor broking service than Dewhurst would sell rancid meat.

The names, and the glow from those names, of individual characters who left their mark are at least remembered by me and probably anyone else who grew up in metal in the crucible of those years. There was Fred Wolff of Rudolff Wolff & Co (later to be taken over by Noranda), Mr Phil Smith of Basset Smith & Co Ltd., who first introduced Polish GOB (‘Good Ordinary Brand’) Zinc after the Second World War because he had witnessed the bravery of Polish servicemen and wanted to help their post-war recovery. Then there were various Lazaruses at Leopold Lazarus Ltd and various Golodetzes at M. Golodetz. I went to school both with a Lazarus and a Golodetz at different times. Their values in trade, whatever they were, were vested in the family name. Whoever would have thought of importing a branding manager and changing your name to the faux-Latin, and rather meaningless name, of Natixis! Then there were the brothers Jacques and Nigel Lion of Philipp & Lion (the last partnership on the ring of the London Metal Exchange) and finally M.C.Brackenbury & Co (where it all started for me) the last partnership outside the ring. Note the absence of the word ‘Limited’ after their company names – this little quirk of financial nature is worth remarking on; for partnership, in law, meant unlimited liability. So it was that, whether through the defence of reputation or through financial prudence, not one of these member companies, despite the always risky world of volatile metal prices, would have undertaken bets, algorithmic trades or investments on behalf of pension funds that could possibly have endangered anyone but themselves.

And so it went….

It is surely an irony beyond humour that the LME today, whose stewards have struggled, for the last few years, to conduct a free and fair open market in base metals, have nevertheless managed to sell the entire market platform.

If that irony was not enough, the other one is that so low has the LME fallen in the estimation of some customers around the world that, however the Chinese run the LME, it could not possibly be worse than at present.

At the heart of the LME is the way that certain banks and large trading houses, such as JP Morgan, Glencore, Trafigura, Goldman Sachs, have been allowed to own not only their rather valuable – it now seems – ring seat and membership but also to own the very warehouses in which metal is stored on warrant, Henry Bath, Pacorini, Nems & Metro respectively. For a market whose purpose was once to reflect the natural equilibrium of purchases and sales, free and unencumbered, expressed in open outcry across the ring of an exchange, situated in a free and democratic country, and to publish a price, once trusted the world over, this cross-ownership was a terrible perversion and those charged with stewarding the market should have resisted it.

They, the stewards, point out, (rather lamely, I may say), that Henry Bath & Son was a founder member of the LME in 1877 and always owned its own warehouse in Liverpool. True, but their warehousing interests represented a minute fraction of overall warehouse space, not over 60% of all space as owned by the above four today.

What this cross-ownership achieved, was to provide a conduit for quantitatively eased money into metals at the cost of any notion that the primary role of the metal market was for the purpose of industry. Instead of resisting this development and focusing on industry and serving the wider world economy through the continued establishment of trusted prices, those charged allowed the exchange to be a play-thing for algorithmic funds. I must say, I found it hard not laugh when I read in the Financial Times that the CEO of listed Hedge Fund Manager, Man Group Plc., had trouble thinking of who to sack because of the poor performance of their funds, as the main party responsible was a computer.

But the LME could not resist the trillions of turnover that Funds brought, and which the LME so enjoyed crowing about in their literature. Those trillions, rarely far from its CEOs lips, are what the new owners of the exchange have their eyes on. I imagine the Chinese cannot believe their luck – not only will they be able to use the exchange as their toy but have been helped along to own the levers too.

Just ask yourself, how is it possible for the stocks of Aluminium on warrant in LME registered warehouses to be 5 million metric tons, and yet premia to take physical delivery $250 per mt? How is it that the price of Aluminium, with about 15% of world consumption on warrant, can be anywhere near $2000 per mt? How is it that if you wish to take delivery of prompt tin in the Far East you will wait two and a half months? Then ask yourself how can this be right?

For those of us brought up in the ante-diluvian metal world of the 1960s, it seems a reversal of the laws of economic nature. In fact I saw a headline the other day in The Financial Times (19.07.12) which read ‘Gold Falls on lack of quantitative easing’. For Gold, just read Copper, Tin, Lead, Zinc, Aluminium or Nickel.

But why worry? I suppose it goes beyond metal and the myopic world of the LME. Mine is that of any concerned citizen, and every pensioner; that if metal prices being discovered are in any way incorrect then surely it must follow that the share prices of companies – such as mining houses – whose businesses are predominantly in the base metals are wrong also. That in turn means that the FTSE-100, which is now over 35% capitalized with commodities-based companies, could also be wrong, and that, in turn, means that pension funds are flying with malfunctioning instruments.

But, what the hell, we just sold it all to China – and the Chinese buyers must be laughing themselves silly. A further sadness, above all sadnesses, for me is a national and patriotic one – for the LME was a gift to the world, originated in these islands, nurtured on free and fertile soil, and trusted the world over. In financial terms it was as rare as the white rhino and, in Chinese hands, it might be just about as safe.

Anthony Lipmann Published – 


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