LME WEEK ASIA - Who cares about fundamentals when there could be a showdown?

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Kathleen Retournekathleen.retourne@fastmarkets.comJoint News Editor - Europe+44 (0) 20 7337 2144

London 10/06/2016 - Market participants will gather at next week's LME Week Asia to discuss as usual the fundamentals, new contracts, precious metals and…

Oh, who am I kidding? The topic on everyone's lips will be that disgruntled brokers are looking to set up a member-backed exchange that will compete with the venerable London exchange.

The news has spread like wildfire; adding another layer of intrigue is the revelation that none other than former LME CEO Martin Abbott would oversee the new exchange.

Hot on its heels, LME parent HKEX hit back with an announcement that it is setting up a physical industrial metal hub in China. The gloves, then, are well and truly off.

So, in the red corner, weighing at 130 years and with the substantial clout of the HKEX behind it, the LME is the reigning and defending metal exchange champion of the world.

And in the blue corner, its challenger - the unproven, unnamed and so far non-existent exchange that makes up in the pedigree of its backers what it lacks in history.

After years of complaints that LME trading fees were too high and that traditional brokers were being pushed aside to make way for the sexier participants of the financial world - algorithm and high-frequency traders (HFT) - traditional brokers are getting ready to rumble.

"It's like a playground incident. They are ganging up on the bullies and challenged them to a fight," a market participant said. "Everyone will be waiting at the school gates to see if there will be a punch-up and who will be the victor."

An industry consultant highlighted the irony of brokers clamouring for the recreation of the market structure they ceded control of when selling the LME to HKEX in 2012.

"Seeing as they plan to keep the same structure I think it'll need to boil down to a physical world fight over the hearts of the producers - a very conservative bunch - so they switch the reference basis for their concentrates pricing. If that goes, the other physicals follow," he said.

Indeed, the battle - if one takes place given that the phoenix exchange is still at the discussion stage for now - will hang on investor backing and producer involvement.

"I am not convinced it has legs," a trader said. "The LME is huge. It has the benchmark and has been used for hundreds of years. I get that some are frustrated but things change and trading evolves."

But a critical mass might be willing to make the switch, others said.

"We are dealing with a generation of brokers now that are not steeped in history - the new generation are just interested in who offers the best deals and because of that they may be willing to do something different," a broker said. "The CME has benefited from this but it is not the answer for all and this platform could be."

"Should the new platform get one or two big producer backing then others will follow. As for the pricing argument, arbitrage would likely keep prices in check - it's no different to what already happens with Comex and the SHFE," he added.

While there are questions about whether there is a need for a rival and whether it can establish itself as a credible alternative, the proposal should at least start a philosophical debate on the roots of the LME structure, Societe Generale's Robin Bhar said.

Still, there are also concerns about a further fragmentation of liquidity at a time of falling volumes and exits from the sector.

"I think the best thing is to stay and try and get reform," the broker added. "It is like the Brexit debate - is it better to fight for more concessions while you are on the inside?"

While the LME has declined to comment on matter, HKEX CEO Charles Li has come out swinging, telling Metal Bulletin he thinks the finances for setting up the new exchange would have "to come from charity if the resulting platform is going to operate on a non-commercial basis".

Meanwhile, HKEX has its eyes on other prizes - its new China platform could boost business in the lucrative but as yet under-exploited Chinese market. But this - and the behaviour of the markets - will be confined to the undercard next week.

"Who cares about the fundamentals when there is a possibility of a showdown? The fundamentals will just be a parting shot," one market representative said.

Seconds away, round one...

(Editing by Mark Shaw) 



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