London Metal Exchange

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Mining-alcans-60px.jpg This article is part of the Mining and Metals project of SpinWatch

The London Metal Exchange (LME) describes itself as "the world’s premier non-ferrous metals market", having traded across $11.6 trillion dollars in 2010 - $46 billion per day.[1] It has three sections of operation: hedging futures, discovering prices and delivering metals.

In July 2011 LME was accused of allowing its traders to lock significant quantities of aluminium in storage, driving up the metal's price globally.[2]

Contents

Aluminium hedging controversy and LME's lax rules on warehousing

In 2011 a series of LME regulated metal storage facilities in Detroit, mostly owned by Goldman Sachs, had accumulated 1/4 of the global aluminium inventory. The storage of metals is in itself a profitable industry, with Glencore, JP Morgan and Trafigura all having followed Goldman Sachs in 2010 in investing in warehouses. Glencore reported $31 million profit from its Italian unit alone in 2010.[3]

Perhaps the main reason for investment banks to control metals warehouses is to be able to influence the global supply of their inventories. In 2011 approximately 70 per cent of aluminium in LME's metal's warehouses were held in bank finance deals where investment banks would buy metals from producers, store them in warehouses and agree to sell at a future date. Aluminium prices were inevitably driven up across the markets and onto the consumers due to the lack of readily available stock. Robin Bhar, minerals analyst at Credit Agricole has commented on the bank finance deals:

"I think it makes a mockery of the market. It's a shame… This is an anti-competitive situation. It puts (some) companies at an advantage, and clearly the rest of the market at a disadvantage. It's a real, genuine concern. And I think the regulators have to look at it." [4]

The LME will enact measures in April 2012 to increase supply from its warehouses but critics have dismissed these changes as insubstantial. Although it will double the minimum delivery rate to 3000 tonnes per day, LME's rules legislate per city rather than per warehouse, meaning that its many warehouses in a city like Detroit will be hit with only a relatively small increase in the amount they have to deliver.[5]

Owned privately by the same investment banks who broker within the LME's famous 'Ring', one might question whether radically changing LME rules would benefit its shareholders.


LME up for sale

Potential sale of the LME for around 1 billion pounds ($1.5 billion) was floated in 2011 after a number of parties expressed an interest in ownership. US trader IntercontinentalExchange (ICE) are probably the most popular bidder, alongside 15 other bidders thought to include the CME Group Inc, the London Stock Exchange, UK-based broker ICAP, Deutsche Boerse-owned Eurex, SGX Singapore Exchange, the Shanghai Futures Exchange and the Hong Kong Mercantile Exchange.

A Reuters release in January 2012 claims that some of the top shareholders in the LME are worried about a possible takeover by ICE, with increased regulation which might 'hurt their lucrative warehousing business.'[6] Another Reuters release explains in more detail why the shareholding banks want weak regulations on warehousing:

Big banks such as J.P. Morgan, Goldman Sachs and Barclays Capital have invested heavily in physical metals business since the economic downturn began by buying warehouses and beefing up their trading teams and financing operations.
Shunting metal around has been a money spinner for them as slowing global growth pulls down commodity prices and leads to stockpiles of surplus material.
For the banks, simply storing all the metal can generate tens of millions of dollars in rental revenues.
LME rules allow warehouses to release only a fraction of their inventories per day, much less than the metal that is regularly taken in for storage. This creates long queues to get metal out and guarantees rental income.
Knowledge of trade flows -- which regions are buying or selling -- and the option to play price differentials between physical and paper markets provide these banks with an added avenue of profit.
Also, LME rules allow large companies to build up big positions in the futures market, which can impact metals prices. Stricter regulation could curb this.[7]

The sale is dependent on the agreement of shareholders who control 75% of LME shares and include J.P. Morgan, Goldman Sachs and Barclays Capital with large share percentages. They could block the sale if they fear tighter regulation. Reuters quote 'a source at a trading company' who said:

'The bigger shareholders would not be in favour of ICE, especially with regard to regulation.'[8]

History

The London Metal Exchange (LME) was established in 1877 above a hatters, out of the rapidly-expanding metals market of the 19th century.[9]

Board members

As of 2000, LME ltd became wholly owned by holding company LME Holdings ltd, whose shareholders are the broker members of the exchange. Board membership below is for both companies, unless otherwise stated.[10]

The Ring

Dating back to when a merchant with goods to trade would draw a circle in the sawdust of a tavern and call all interested bidders to stand around it,[16] the LME ring is now made of leather-seats and it only admits select Ring Dealing Members. These are:[17]

Lobbyists

Affiliations

Contact

  • Address: 56 Leadenhall Street, London, EC3A 2DX, UK
  • Tel: +44 (0)20 7264 5555  
  • Fax: +44 (0)20 7680 0505

Resources

Notes

  1. 'LME Homepage: About the LME' accessed 10 Aug 2011
  2. Pratima Desal & Clare Baldwin 'Goldman's new money machine: warehouses', 29 July 2011, accessed 10 August 2011
  3. Pratima Desal & Clare Baldwin 'Goldman's new money machine: warehouses', 29 July 2011, accessed 10 August 2011
  4. Pratima Desal & Clare Baldwin 'Goldman's new money machine: warehouses', 29 July 2011, accessed 10 August 2011
  5. Pratima Desal & Clare Baldwin 'Goldman's new money machine: warehouses', 29 July 2011, accessed 10 August 2011
  6. Susan Thomas and Douwe Miedema. Reuters, The Guardian website. Friday January 27 2012 DEALTALK - Owners, insiders jockey ahead of LME sale Accessed 21/02/2012
  7. Melanie Burton and Susan Thomas (Reuters), Wednesday , 04 Jan 2012 Top banks likely to block LME sale - sources Accessed 21/02/2012
  8. Susan Thomas and Douwe Miedema. Reuters, The Guardian website. Friday January 27 2012 DEALTALK - Owners, insiders jockey ahead of LME sale Accessed 21/02/2012
  9. 'LME Homepage: History of the LME', accessed 10 August 2011
  10. 'Corporate Structure', accessed 10 Aug 2011
  11. Christopher Hope 'Brian Bender, civil servant who accepted most freebies, to retire with £1.85m pension', 13 February 2009, accessed 10 August 2011
  12. Advisory Committee on Business Appointments (ACoBA) Annual Report 2010-2011
  13. 'LCH.Clearnet Group BOD', accessed 10 August 2011
  14. 'NEW INDEPENDENT DIRECTOR APPOINTED TO THE BOARD OF LME HOLDINGS LIMITED', London Metals Exchange, 20 September 2011, accessed 24 September
  15. 'Witan Board Of Directors' accessed 10 August 2011
  16. 'LME homepage: History of the LME', accessed 10 August 2011
  17. 'LME homepage: Ring dealing', accessed 10 August 2011
  18. UK Public Affairs Council, Register for Period 1 September 2011 to 30 November 2011
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