London 20/06/2016 - The multiple challenges the London Metal Exchange (LME) faces could prove a "positive force for change", Macquarie said in a report seen by FastMarkets.
The exchange has been under fire due to lower volumes, higher fees and member fears about being bypassed on electronic access. And since it was bought by Hong Kong Exchange & Clearing (HKEX) in 2012, it has not made the inroads as hoped.
Other exchanges such as CME and SHFE have been snapping at the LME’s heels. While the LME is still the leading metal exchange, its volumes dropped nine percent in the first quarter of 2016 when both the CME and the SHFE reported increases.
And with former CEO Martin Abbott and a group of broking firms looking at the possibility of establishing a new metal exchange, the LME has many fires to fight.
"[But] we think the LME will ride out these storms - and no doubt find fresh problems in coming years - maybe never accessing China in the way it intends but joining the dots for the industry in the rest of the big wide world," the bank said.
The strengths of the LME lie in its being the oldest, largest and most international metals bourse with widespread market penetration, commercial acceptance and a strong derivatives offering.
But its weaknesses include a weak yet volatile commodities market and reduced consumer hedging and spec appetite. Other concerns are the sharp fee hike, a complex date structure and an increase in regulatory oversight.
Competition from the SHFE, the CME and now the mooted member exchange all create threats to market share. Of its rivals, Macquarie believes the CME has made a good call with its successful aluminium premium contracts. These launched ahead of the LME's own premium contracts and have quickly gained traction while the LME’s have failed to garner business.
But outside this and the growing volumes in its copper futures contract, CME "barely" challenges the LME, it said.
But the SHFE is a tougher opponent, one that appears to have political backing - Beijing feels that China should be setting prices rather than London, which is a sympathetic perspective given its market size.
But the SHFE lacks commercial players, who should "always be the backbone of a truly credible commodities exchange", Macquarie said.
On the new "rebel" exchange, it believes it would be a "gargantuan" task to establish a functioning rival from scratch since the LME is so entrenched with more than 70 percent of metals trading volumes
As well, members might have suggested such measures to extract some concessions on unpopular changes.
While the LME "enraged" its own members to the point of them plotting against, the exchange still offers the "broadest and most commercially accepted" global industrials metals clearing and trading platform.
Today's weaker commodities market has reduced consumer hedging activities, contributed to lower on-exchange volumes trade while "other exchanges are less reliant on the commercial side of the business and have seen volumes rise in the same period", it said.
(Editing by Mark Shaw)