(Repeats April 12 column. The opinions expressed here are those
of the author, a columnist for Reuters.)
* LME volumes in Q1 by major contract tmsnrt.rs/2p4ZSDT
By Andy Home
LONDON, April 12 The London Metal Exchange (LME)
has just laid to rest its steel billet contract.
No need to panic if you didn't notice. The contract hasn't
traded since June 2015. The last 65 tonnes of registered billet
stock left the LME warehouse system a year ago.
The exchange has tweaked and prodded the contract many times
since its launch in 2008 but to no avail.
"The LME believes that the steel billet contract no longer
functions as an effective price discovery tool and risk
management solution for the physical industry," the exchange
said in an April 10 notice to members. The contract will be
suspended with immediate effect.
Fortunately for the LME, it has two replacement products for
the steel industry's hedging needs.
Its steel scrap contract, launched in November 2015, seems
to be doing just fine. Volumes surged to 54,700 lots in the
first quarter of 2017 from 1,729 a year ago. Open interest at
the end of March hit a new record at 4,691 lots.
The steel rebar contract, launched at the same time, is also
experiencing steady growth, albeit not on the same scale.
Unlike billet, which ran into deliverability problems almost
as soon as it was launched, these steel products are not
physically deliverable but are rather monthly contracts cash
settled against third-party indices.
Such a format, the LME said, is "better suited for the risk
management needs of the steel industry".
The steel contracts' success would appear to reinforce the
case for the LME to re-engineer its other contracts towards a
more standardised format.
Because the broader picture is one of still-falling volumes,
keeping the pressure on the exchange, and its owner, Hong Kong
Exchanges and Clearing, to try and turn the trend.
Graphic on LME volumes in Q1 2017 by major contract:
Average daily volumes on the LME fell by 13.1 percent in
March and 4.6 percent in the first quarter.
Those headline figures, however, somewhat overstate the
trend due to the higher number of trading days this year
relative to last year.
In absolute terms volumes were down by "only" 1.5 percent in
the first three months of 2017.
The problem is that the trend of falling volumes has been
running almost continuously for over two years now.
Successes such as the steel contracts and cobalt, which has
seen volumes explode over recent months as the price has gone on
a super-charged rally, are still too small to
compensate for lower activity in the LME's core contracts.
True, there are other exceptions to the trend.
Both nickel and zinc saw volumes increase year-on-year in
the first quarter to the tune of 5.0 percent and 6.8 percent
But on the other side of the ledger, aluminium alloy seems
to be hovering on the brink of meltdown with volumes collapsing
by 56 percent in the first quarter.
Let's face it. The alloy contract could go the way of other
failed LME offerings such as molybdenum without creating any
shock waves through the industrial metals landscape.
The real issue facing the LME, both exchange and trading
community, is the slide in volumes in flagship contracts such as
aluminium and copper.
The latter has become the poster child for the reformist
faction in the LME community because of the contrast between
falling activity in London, where volumes tumbled another 7.7
percent in the first quarter, and the CME's contract,
which saw volumes increase by 25.2 percent.
This seems to suggest that business is migrating away from
the LME with its complex date system to the more vanilla futures
product offered by CME.
But it may not be as straightforward as that.
If there was a wholesale shift of business towards CME
because of its product structure, how come its lead and zinc
contracts are moribund? Neither traded at all in March and lead
hasn't traded so far this year.
The CME's most successful new contracts have been its
physical aluminium premium suite, which complements rather than
directly challenges the LME's own aluminium contract.
That the CME copper contract is attracting incremental new
business is not in doubt. To what extent it is doing so by
directly grabbing existing LME business, on the other hand, is
It's worth noting, by the way, that the third pillar of
global copper trading, the Shanghai Futures Exchange, has
experienced a 41-percent decline in copper volumes so far this
Does that mean it too is losing business to CME or is it
simply a case of speculative money moving into more exciting
markets such as lead, where Shanghai volumes rocketed by 500
percent in the first quarter?
A FINE LINE
Excepting the puzzling copper piece of the liquidity jigsaw,
the overall downtrend in LME volumes would appear to bear out
the views of the traditionalists on the exchange, who argue that
the real culprit is the increase in trading fees which has sent
business back into the over-the-counter shadows.
How else to explain, for example, falling volumes in the
lead contract with no apparent beneficial impact on the CME's
If fees are the real problem, traditionalists argue, there's
no need for a wholesale restructuring of existing contracts to
stop the rot.
The demise of the billet contract may signify nothing more
than that it was always a flawed concept, rooted in physical
delivery in Turkey, a country that simply didn't have the right
tax code to cover trading of metal in bonded warehouses.
That the downtrend in LME volumes is a problem for the
exchange and its users, particularly the broker community, is
not in question.
Why volumes have been falling is a much harder question to
answer. It's a messy mix of industrial cycle, investment cycle,
fee cycle and, somewhere in there, contract structure.
Pity the new chief executive who will have to disentangle
this knot and try and find the fine line between traditionalists
and reformists and their respective camps of industrial and
Fortunately for him, or her, everyone is going to get a stab
at answering the question. A major discussion paper is on its
Whether it generates a clear answer remains to be seen. But
each passing month of lower volumes sharpens the question.
(Editing by Susan Thomas)