The
social and commercial whirl of the LME Dinner Week is now over for another
year; were there any overall themes or expectations to the conversations,
discussions and debates had by participants? (Obviously, this is going to be
subjective, since I can only comment to the extent of my own involvement.)
Prices
Since
the function of the LME before anything else is as a price discovery mechanism,
I guess the most significant question is the one that is always the first on
anybody’s lips: will the price go up or down from here? I understand, of
course, that all the metals have their own individual price trajectory, but
nevertheless it’s a valid approach to consider the whole class together. And
this year, there seems to be a fairly chunky majority giving the same answer to
that question. Mostly, those to whom I spoke expect the next price move to be
upwards. Actually, in the circumstances, that’s not too much of a surprise. The
market has been wallowing for most of the year so far, unable to see clearly
amongst the global mix of Chinese demand, Brexit, the US election and the
seemingly endless low interest rate/QE-heavy economic policies being followed
by many of the major players. All of those factors, I would argue, have to one
extent or another contributed to a directionless market. However, although it’s
directionless, it is so at a relatively low level. It is true prices
have improved from a while back where production and sales cost were
disturbingly close for many producers, but broadly at current levels, there is
more space on the upside than the downside. Certainly the straw poll taken
around the table where I was sitting last Tuesday night was modestly
optimistic, on that basis. The balance of probabilities favours up a bit more
than down, without any of my fellow-diners being significantly more optimistic
than that. There are, however, as well those more positive, looking for a
significant upswing on the back of resurgent demand and - perhaps more
pertinently - looming supply side issues. Well, OK, some looking modestly
firmer, some more positive than that; what I didn't find was too many on the
negative side.
The LME
Where
there is a lot less commonality of thought is the question of the direction of
the LME itself - in other words, the institution - and its likely future.
Michael Farmer made some very pertinent comments in his speech, concerning the
current cost of trading and the influences right now bearing on the Exchange.
Now, I’ve heard lots of debate about costs, and I have some sympathy with both
sides. It was inevitable after the purchase of the Exchange that the new owners
would raise fees, in order to recoup some of their investment (otherwise,
shareholders might have become unhappy); so it wasn’t unexpected, and, frankly,
to an extent, the executive have listened and made some concessions. However,
it still remains true that the LME is - in relative terms - an expensive
exchange. One could argue that in a way that is irrelevant, within reason, as
long as the unique nature of the LME’s trading structure is of sufficient
appeal to its users. In other words, if the market offers something not
available elsewhere, and it’s something users particularly want, then surely it
can charge a premium price?
Well,
yes, that’s a good argument. But then we look at the second part of Michael
Farmer’s point above; the influences currently acting on the Exchange, in
particular the growth of algorithmic and high-frequency trading. I would
suggest that those traders have very little interest in the date trading
structure of the LME: certainly in the case of the latter, given the short term
of position holding, it’s pretty much irrelevant. So there is a delicate
balance to find here, because those purely financial and electronic traders do
have alternatives and, although like-for-like comparisons are not so
straightforward, it would appear that CME’s market share, in copper for
example, is growing relative to the LME’s. And there is Shanghai out there,
and, lurking in the wings, the possibility of other trading venues. This is a
difficult one for the LME, because the new volume it needs to keep growing will
have to come from precisely the areas of the business which have the greatest
sensitivity to the cost of trading. In the end, although the trade may moan and
groan, the cost of its hedge is a less crucial element of a particular trade
than it is for a high-frequency trader going in and out on the slenderest of
price movement - and that trade doesn’t need the LME’s unique structure.
Algos and AI
Computerised
trading came up as a topic of conversation amongst the group with whom I dined
last week. They were made up of physical traders, warehousemen and LME brokers,
all frankly from what could be called the senior generation. I made what I
thought was a relatively uncontroversial statement that I could envisage not
only a growth of algorithmic trading but also a burgeoning control of that
trading by artificial intelligence. It wasn’t a popular view. The physical
traders maintained that electronic devices would not be able to replicate their
particular range of skills. In fact, I agree with that, and my point was
directed at exchange trading, not the physical arena. But the LME brokers were
also not convinced, and argued for the pre-eminence of personal contact. Well,
I think there is, amongst other things, a generational issue here. Plenty of us
grew up in an era where the broker saw his task as keeping the clients informed
of the general market; news, information, price changes - passing all these on
was a crucial element of the broker/client relationship. But in a world where
all that news, all those snippets of information, all those price changes are
disseminated virtually instantly across the world, then the need for that close
relationship - in my view - is severely weakened. In the end, I think this is a
generational issue, and as those of my generation bit by bit bow out of the
business, then electronic relationships will progressively replace the
personal. If I’m right about that, then it’s a small jump - in understanding,
even if a big one in technological development - to a position where AI is
increasingly used to harvest news, information and price changes to make
trading decisions. I believe we are getting very close to the beginning of that
change in the world. To be fair, though, I have to confess that mine was a
minority view at my dinner table.
Anyway,
there are a few observations from last week. Quite positive on price, a
difficult balancing act for the LME and - maybe - only a few steps from a
radical change to the way the market works and the way we understand it.
Politics
Writing
this on the day of the US election, I couldn’t not say something about it. I
offer my heartfelt sympathy to American friends. In the summer of this year, we
had a referendum on membership of the European Union. I knew what I
instinctively thought, but the campaign behind it was dire. The other side had
a weaker case and an equally dire campaign. It was a disheartening exercise,
and nothing that’s happened since has made it look much better. But now look
across the Atlantic: if I were voting, I would be voting against somebody - as
the worse of two evils - rather than for somebody. That’s a terrible state to
reach.
The
period of English history in the twelfth century covering the reign of King
Stephen and the civil war between him and his cousin, the Empress Matilda, is
sometimes referred to as the time “when Christ and all his Saints slept”. I don’t know about saints sleeping, but God,
whom we are told should bless America, must be looking the other way at the
moment.
Writing this morning, after seeing the result,
it looks like it’s not just America from whom He is looking the other way.
Where have the grown-ups gone?