Column: As LME looks east, CME throws down challenge in west: Andy Home

Silver Acadia Exploration

25/05/2015 01:00

(Repeats May 22 item. The opinions expressed here are those of 
the author, a columnist for Reuter) 
    By Andy Home 
    SINGAPORE, May 22 (Reuters) - The London Metal Exchange 
(LME) Asia festivities have just wrapped up in Hong Kong.  
    It is the third such annual event since the LME was bought 
by Hong Kong Exchanges and Clearing (HKEx)  0388.HK  in 2012 and 
each year, it seems, the Asian gathering of the metals industry 
gets larger.  
    The grand old London lady of metals trading is all part of 
Charles Li's vision of positioning Hong Kong as the renminbi 
gateway between mainland China and international markets. The 
HKEx chief is confident the LME will help open up a commodities 
channel to complement the newly-opened Stock-Connect highway. 
    It's very much still an aspiration but LME Week Asia is 
where the foundation stones are being laid.  ID:nL3N0YD2AE   
    However, while HKEx looks east, U.S. exchange CME  CME.O   
has just thrown down a challenge in the west with an 
announcement it is planning to launch a zinc contract for North 
American users.  ID:nL1N0Y90RI  
    The LME itself is looking to launch new contracts, including 
a re-entry into the ferrous trading space, in effect 
counter-challenging CME's existing steel offering.  
    The stage is being set for a battle for metals market share 
in the world outside China. 
     
    CME CHALLENGE 
    The CME, via its COMEX division, has a long history in the 
copper market, offering futures, options, "mini" contracts and 
swaps.  
    Historically, however, it had failed to mount any real 
challenge to the LME's broader dominance of other base metals 
markets outside of China.  
    Until, that is, North American aluminium users rebelled 
against the LME's well-documented warehouse load-out issues and 
the resulting disconnect between LME basis price and physical 
premiums.  
    CME launched first a physical aluminium premium contract 
 0#AUP:  and then an "all-in" aluminium futures contract 
 0#ALI: .  
    Now comes zinc, another opportunistic move to capitalise on 
dissatisfaction with the LME's storage system.  
    Announcing the launch, Derek Sammann, head of commodities at 
CME, said the new physically-delivered contract enables 
industrial users "to take advantage of the integrity and 
efficiency of our warehousing practices." 
     
    BEYOND THE QUEUES 
    The question for CME, though, is whether it can leverage 
that discontent with the LME's warehouse system to build a North 
American benchmark that would offer a sustainable price 
discovery alternative to that of the LME.  
    Right now the jury is very much out.  
    The graphic below shows volumes and open interest on the two 
CME aluminium contracts.  
     
****************************************************** 
Graphic on CME aluminium contracts' performance: 
http://link.reuters.com/nyv74w      
****************************************************** 
     
    It is clear that the premium contract, indexed against 
Platts' Midwest U.S. aluminum assessment, is faring much better. 
    That's not entirely surprising given the massive turbulence 
in the premium market.  ID:nL3N0Y65ES  ID:nL5N0XW458  
    Premiums across the globe, including that in the U.S., are 
collapsing and one of the reasons they are doing so is because 
of the LME's new rules forcing faster load-out. Moreover, the 
exchange is mulling even harsher measures to force even faster 
load-out.  
    One possible consequence is that the premium disconnect 
vanishes, negating the very reason for using a premium contract 
in the first place.  
    It's noticeable that the CME's all-in aluminium price 
contract, which would in theory represent a true alternative 
pricing model to that of the LME, has struggled to pick up 
momentum since its launch in May 2014.  
    If this is only about LME queues, in other words, CME's 
challenge may last exactly as long as the queues take to unwind. 
    And that goes as much for zinc as it does for aluminium.  
     
    LME COUNTER-CHALLENGE 
    The LME, meanwhile, has not been idle either.  
    A full suite of global aluminium premium contracts is coming 
later this year, including a North American premium contract.  
    Evidently, they too might struggle to gain traction in an 
environment where premiums are rapidly moving back to historical 
norms.  
    LME Chief Executive Garry Jones, speaking at Wednesday's 
seminar in Hong Kong, pointed out that just because you've 
recently had a flood, doesn't mean you don't need an insurance 
policy against future floods. 
    Well, it all depends on whether you regard the last flood as 
likely to recur or as a one-off historical anomaly.  
    Perhaps more strategically interesting is the LME's plan to 
re-enter the world of steel trading with two new contracts, one 
for steel scrap and one for rebar.  
    Unlike the existing dormant steel billet contract, these 
will be cash settled and indexed against The Steel Index (scrap) 
and Platts (rebar).  
    Both will be geographically centred on the Turkish market, 
moving in where CME's Turkish billet contract has failed to get 
off the ground. It traded just 95 lots last year and failed to 
trade at all in the first four months of this year.  
    CME's better established steel contracts, all part of its 
"virtual steel mill" offering, are rooted in the U.S. market.  
    Their performance has been mixed, ranging from the relative 
liquidity of the hot rolled coil (HRC) contract to the barely 
traded scrap contract to the completely inactive HRC options 
contract.  
    The exchange-traded steel space outside of China is still 
very much up for grabs and the LME's second attempt at it raises 
the stakes for CME.  
    Time will tell as to how successful it will be. The same 
holds true of CME's attempt to carve out a North American base 
metals business from the LME's existing franchise.  
    One thing is for sure, though. The competition for exchange  
share in the world of metals trading is set to heat up. 
      
 
 (Editing by Susan Thomas) 
 ((andy.home@thomsonreuters.com)(Tel: 44-207-542-4412)) 
 
Keywords: LME CME/AHOME