London 02/10/2015 - LME Week 2015 is nearing but the party spirit is in short supply while the market weathers the storm of tough economic conditions, low prices and a slowdown in demand.
None of this bodes well for risk appetite, the decline of which has weighed on profit margins and dampened sentiment.
In uncertain conditions traders are unwilling to run a large book and manage the risk - instead, they take the trade and exit quickly.
"The last time the mood was like this before LME Week was during the late 90s/00s. It was a time of not much volatility and that is not good for traders," a category one trader said. "If volatility goes, then so does the need to hedge and it becomes a vicious circle... things could get nasty."
The general unwillingness to assume risk "has siphoned off significant liquidity", a source at a category two member bank said.
Copper has shed more than $1,000 since last year - it recently traded at $5,097 per tonne, having fallen below $5,000 last month, its softest since June 2009. China - the leading consumer of metals - has slowed and tougher rules have come into play as regulators attempt to ensure there is no repeat of the 2008 financial crisis.
"Fortunately, we still have clients who seek exposure to base metals, albeit to a lesser extent than previously," the bank source said. "When those clients require price-efficient liquidity with minimal slippage, the most likely source is other clients, which we locate. The LME still gets their fees but the LME floor might no longer see these flows."
Indeed, the lifespan of open-outcry LME trading is once again in question following the exit of JP Morgan last month. The continued existence of the ring divides opinion but most participants agree that more risk is needed to boost liquidity.
"There are only one or two category one members that are taking any type of risk - business is hand-to-mouth at the moment and minimal business is being put through," the cat one trader said.
JP Morgan "ruffled a few feathers" when it downplayed the importance of the ring on its departure, a second category one trader added.
"We know the ring needs more risk but wider market conditions are bad and people are scared to poke their heads above the [parapet]," he added.
With ring membership dwindling to nine and with Societe Generale the only bank left on the floor, some industry participants believe it is only a matter of time before others follow.
"Numbers could dwindle further without a problem as long as risk appetite remains but in the current climate why establish or buy a ring dealing member at a premium?" a senior source at an LME firm said.
"If the fourth quarter continues in the same vein as the rest of the year, others will pull off the floor," a broker added.
While there is talk of a Chinese bank joining, this rumour has been circulating since GF Financial joined, while R.J O' Brien has declined to comment on speculation that it is considering category one membership. On the flipside, Marex remains on the slate while the much-discussed Metdist/China Construction Bank tie-up has yet to materialise.
"It may be a case of wishful thinking - a year or so back we all thought that Mitsui would be joining and that never happened so it is hard to know what the truth is when it comes to joining," an LME trader said.
But with western banks looking to exit metals, smaller brokerages are looking to take a piece of the pie - most probably at the category two-five levels.
"Increased regulatory costs and a more restrictive environment mean that banks will find it increasingly difficult to make the broker model work," the senior LME firm source said.
"Plus many large global brokerages will continue to struggle in the low interest rate world - too many relied too heavily on making a margin income on client monies. It is not easy to enter successfully - niche may be the way to go," he added.
Still, smaller firms may be dissuaded by the stresses that have plagued the sector since the global financial crisis, he suggested.
"It will be challenging for the entrant brokerage companies to replicate the former role of the banks in the wake of the mass exodus... due to contemporary credit and regulatory stringencies," the bank source said.
(Editing by Mark Shaw)