(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON, Jan 9 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
The last year, however, has seen LME prices sway to the
increased gravitational pull of China's Shanghai Futures
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.
Graphic on LME volumes annual change:
Graphic on LME volumes by contract:
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
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
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
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,
Graphic on CME aluminium premium contract volumes:
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
But CME's physical premium contracts have gained traction.
It launched two new ones last year, covering Japan and European
duty-paid metal, adding to its existing Midwest and European
All four have recorded respectable volumes and seen market
open interest trending higher.
These complement, rather than directly challenge, the LME's
aluminium contract. The CME's own "all-in" price contract, which
does represent a direct challenge, is still struggling to gain
momentum. It traded 8,241 lots last year, compared with the
68,872 lots traded on the Midwest premium contract and the 4.5
million traded on the LME.
But the split in aluminium pricing, with the basis set in
London and the physical premium set in the United States, seems
to be hardening.
And there may be more to come in the aluminium space. CME
has also launched aluminium alloy and alumina contracts.
While the latter has so far failed to take off with just 60
lots traded in three months of existence, the alloy product is
ticking over, albeit slowly.
Watch both spaces in the year ahead.
While the LME's core role in industrial metals pricing
remains largely intact, fear of the increased potential
competition coming from west and east has pushed the exchange
into opening up new markets for exchange trading.
In November 2015 the LME launched two new steel contracts,
one for scrap and one for rebar. Volumes reached 49,099 lots and
8,637 lots respectively last year.
CME had first-mover status in the ferrous space but its
hot-rolled coil contract saw volumes slide 8 percent last year,
while its scrap contract saw only minimal activity and its
billet contract none at all.
The LME has made no secret of its ambition to expand further
its steel product suite, raising the prospect of a steady creep
of exchange pricing into a market that has so far been largely
resistant to the concept.
Both those steel contracts are cash-settled and indexed
against third-party price assessors, a break with the LME's past
of making physical deliverability a core function of its
Now it has a template, however, expect more new products to
be launched with esoteric markets such as ferrochrome possible
And this is the real creeping revolution in the way
industrial metals are priced. Although direct competition
between the three exchanges is still muted for now, there are no
guarantees that this will remain the case.
Future battlefronts are being opened up and some of these
are going to trigger more structural changes in metals pricing.
(Editing by Dale Hudson)