Traders work on the floor of the London Metal Exchange in London, Britain, September 27, 2018. REUTERS/Simon Dawson/File Photo Acquire Licensing Rights
LONDON, Oct 13 (Reuters) - The London Metal Exchange's (LME) Monday seminar was packed out, the Tuesday black-tie dinner was as glitzy as ever and the champagne and wine flowed liberally in the many meetings and cocktail parties taking place across London's West End. Inconel 800
This year's LME Week, the annual gathering of the world's metals industry, felt like a return to bygone days, the numbers boosted by the welcome return of Chinese visitors after three years of travel restrictions.
But last year's nickel crisis continues to cast a long shadow over the 146-year-old exchange.
Judgment is pending on the lawsuits brought by U.S.-based hedge fund Elliott Associates and market-maker Jane Street Trading over the controversial cancellation of nickel trades.
The LME is still in recovery mode. The focus is on strengthening its trading and clearing systems and polishing its ESG credentials in an effort to regain trust with investors and industrial players respectively.
Hong Kong Exchanges and Clearing (0388.HK), which bought the LME in 2012, still views the LME as "front and centre in our ambitions", chief executive Nicolas Aguzin reassured the Monday audience.
But while the LME turns inwards to heal, it risks being outflanked by rivals looking to get in on the green transition metals boom.
The LME can take comfort from a return to volume growth this year. Trading activity rose by 5.2% year-on-year in the first nine months of 2023 after sliding by 8.3% in 2022.
The strongest driver has been the lead contract. Volumes have grown by 42% so far this year, the heavy metal attracting lots of investor interest after its inclusion in the Bloomberg Commodity Index from the start of 2023.
Scrap remains the star of the LME's ferrous suite, underpinning a 52% increase in volumes across the exchange's seven listed steel products.
Nickel, unsurprisingly, is lagging the broader recovery. Average daily volumes picked up in the July-September quarter but were down by 26% year-on-year over the first nine months of 2023.
Open interest has grown from 140,166 contracts at the end of January to 184,571 at the end of September but is still some way off participation levels prior to March last year.
LME stocks also remain low at 42,800 metric tons, which is why the exchange is fast-tracking producer brand applications, particularly those from China, where operators are bring on new LME-deliverable nickel capacity.
Rebuilding the London nickel contract is clearly very much work in progress.
Others, meanwhile, are looking to muscle into the LME's nickel price discovery domain.
Global Commodities Holdings (GCH) continues to work on a spot index for Class I refined nickel that would allow an exchange partner to generate a futures market.
Singapore's Abaxx Commodities Exchange, owned by Canadian-listed Abaxx Technologies Inc. (ABXX.NLB), is planning to launch a nickel sulphate contract, the world's first for a type of nickel used to make the lithium-ion rechargeable batteries that power electric vehicles.
The Shanghai Futures Exchange (ShFE) is also looking at its nickel offering, although its interests are closely aligned with those of the LME.
Both trade high-purity Class I refined nickel, which accounts for a diminishing part of the global market. The mismatch played a part in last year's nickel debacle and has created price disconnects with other forms of the metal.
The Shanghai market also took a big collateral hit from the London turmoil, volumes on its nickel contract collapsing by 53% last year relative to 2021.
The two exchanges "have opened a new chapter of close cooperation and we intend to further deepen our collaboration in 2024," LME chief executive Matthew Chamberlain told the LME dinner audience.
He offered no details, but nickel is almost certainly top of the mutual assistance agenda.
No metals seminar is these days complete without a discussion of the booming electric vehicle (EV) market.
Nickel is a core input for many EV batteries, which is why there is so much to play for in terms of an efficient price discovery forum.
But when it comes to other battery metals such as cobalt and lithium, the game is already over.
The LME's cobalt contract hasn't traded since March and its lithium contract hasn't traded at all. Those wanting some EV metals action have turned to the CME (CME.O).
The U.S. exchange launched its cobalt contract in 2020 and has seen activity mushroom over the last year. Volumes more than doubled and open interest more than tripled in the first nine months of 2023.
CME's lithium carbonate contract registered record monthly volume in September and open interest has surged from just 429 contracts at the start of January to 7,532.
Perhaps more disconcertingly for the LME, the CME's aluminium contract is also going from strength to strength with rising participation from both industry players and investors. Volumes hit a fresh record in September and were up by 176% over the January-September period.
Exchange trading volumes are not a zero-sum game. A liquid CME aluminium contract opens up new arbitrage opportunities with both London and Shanghai, in theory benefiting all three exchanges.
However, it's clear that the LME is losing its previous grip on global price discovery.
This in part reflects a world that has passed peak globalisation and a metals chain that is rapidly becoming more regionalised.
But in part it's also a problem of the exchange's own making. The blow-out of the nickel contract and the resulting near-death experience of both brokers and exchange have sapped confidence in the historical market of last resort.
The exchange is still healing and may yet take more knocks depending on the outcome of the legal action in London and the ongoing investigations by British regulators.
This year's LME dinner marked a break with tradition. There was no guest speaker and, perhaps more importantly for many guests, no traditional bet on the length of the guest speech.
Rather, the metals men and women were regaled with some dancing from Ireland's Riverdance ensemble. Irish dancing is high energy and requires intricate foot-work but the dancer remains vertically rooted to a single spot.
It's an apt description of the LME right now.
The opinions expressed here are those of the author, a columnist for Reuters.
Our Standards: The Thomson Reuters Trust Principles.
Senior metals columnist who previously covered industrial metals markets for Metals Week and was EMEA commodities editor at Knight-Ridder (subsequently Bridge). Started up Metals Insider in 2003 and sold it to Thomson Reuters in 2008, he is author of ‘Siberian Dreams’ (2006) about the Russian Arctic.
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