OPINION - You come at the king, you best not miss

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Tom Jennemanntom.jennemann@fastmarkets.comSenior North American Correspondent973-204-3383

Winter Park, Florida 13/06/2016 - Italian Renaissance philosopher Nicolo Machiavelli once noted that there is nothing more difficult and dangerous, or more doubtful of success, than an attempt to introduce a new order of things.

"The reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order; this lukewarmness arising partly from the incredulity of mankind who does not truly believe in anything new until they actually have experience of it," Machiavelli wrote in the The Prince.

This timeless passage neatly applies to last week's announcement that several base metals brokers are in talks with Martin Abbott, former CEO of the LME, to explore the possibility of launching an alternative trading platform to the London Metal Exchange (LME).

"There is certainly more dissatisfaction with the LME and its fee structure and general attitude than I can ever recall. Much of this is focused solely on the fee structure, which is forcing members to pass on many more if not all of the costs to clients," Malcolm Freeman at Kingdom Futures said.

But soon the euphoria from the initial announcement will fade and the challengers are well aware of the many hurdles that lie ahead. It's never easy to knock out the heavy-weight champion, they fully understand.

"It will take a bizarre series of events for any new exchange to rival the LME. Tradition and familiarity within the market are hard attributes to overcome," a US trader told FastMarkets.

One of the bigger obstacles will be to convince market participants outside of the London bubble that another exchange is needed. And, to this point, US and Asian producers, consumers and traders have been somewhat sceptical.

"People are frustrated [with the LME] but that's an emotion, not a strategy," a US trader said. "[The new exchange's] success or failure ultimately comes down to funding and execution, neither of which are easy to come by."

"Attracting liquidity and producing reflective prices takes money but mostly it requires perfect timing and plenty of luck," he added.

The new group would be best served to remember that the LME is used by a wide variety of brokers, consumers, producers, traders and recyclers throughout the supply chain circle, a US-based aluminium billet producer said.

"I believe the only way a new exchange becomes as widely used as the LME is if they are totally up-front and transparent. The LME has built a powerful brand only because it has had no real competition over the decades," the billet producer said. "But, globally, who else is there?"

It's a similar story in Asia where participants are not exactly singing the LME's praises but nevertheless they are not yet convinced that a new LME-style exchange based in London is the best answer.

"It's wishfully thinking to build another exchange to replace the LME. It definitely underestimates the influence of Chinese markets and if the Beijing does not give it a green light - then new venture will be short-lived," a Chinese smelter source said.

Additionally, HKEX already has a head start in Asia - it is in the process of preparing a spot commodities trading platform in China.

Initially, the platform would start with major base metal products and would then gradually expand to other product categories. Operations are expected to commence in the first half of 2017.

"[In London,] the brokers are upset with the LME so people there might be gung ho [for a new exchange]. But it is a global market these day - the real challenge will be selling the idea to people everywhere. That has to be their number one goal," a trader told FastMarkets.

(Additional reporting by Vicky Chen and Kathleen Retourne, editing by Mark Shaw) 



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