Four exchanges – CME Group, InterContinental Exchange (ICE), NYSE Euronext and the Hong Kong Exchange – have emerged as contenders for the London Metal Exchange, which set a deadline for bids of May 7.
Metal Bulletin outlines some of the salient issues in this fascinating takeover story, which has at its centre the 134-year-old LME, the world’s largest metal market – a prize asset in the global consolidation of exchanges.
What are the assets and advantages the three USA-based exchanges and the Hong Kong exchange could offer to shareholders of the world’s largest metal market?
Why are they are interested?
What questions will board members, shareholders and current users of the market be asking as the deadline approaches as they weigh which exchange makes the best financial offer? Which offers the most compelling vision for the LME’s future? And which has the best people?
Market capitalisation: $17.8 billion
CME Group, owner of the Chicago Mercantile Exchange, the Chicago Board of Trade (which it won after a battle with ICE in 2007), Comex and Nymex, is being tipped by some as the front-runner in the bidding process.
Alongside copper and precious metals contracts, it offers trading in interest rates, equity indices, foreign exchange, energy, agricultural commodities, weather and real-estate contracts.
By its reckoning, CME Group offers the “widest range of global benchmark products across all major asset classes”, and it has been increasing its footprint in Asia in recent months with a strategic partnership with Bank of China to promote cross-border commodities trading.
Last year, it also launched CME Clearing Europe
to expand its clearing operations in Europe, and it now clears more than 170 different energy, commodity, metal and freight contracts through the platform.
Buying the LME would make CME Group by far the most liquid metals trading exchange in the world, and one that is far more accessible than the Shanghai Futures Exchange, which in the event of a successful bid would become its sole major rival.
CME Group’s average daily metals trading volumes have nearly doubled since 2008, but the group expects fierce competition in this and the other markets it is active in.
“Competition is influenced by liquidity and transparency of the markets, variability in fee structures, breadth of product offerings, including quality of new product development as well as efficient and innovative technology,” CME Group said in its latest annual report
The LME has been investing heavily in improving these facets of its business, and buying the LME would give CME Group breathing space in the predatory world of global trading exchanges.
Would a successful bid from CME offer brokers as strong an entrance into Asian markets as one other potential bidder, the Hong Kong Exchange?
It owns the Comex copper contract. How would it market both that and the LME’s own copper contract?
Hong Kong Exchange
Market capitalisation: HK$135.5 billion ($17.5 billion)
Confirming its bid this week
, Hong Kong Exchanges & Clearing (HKEx) is the sole exchange to have publicly announced its participation in the bidding process.
In an effort to diversify away from equities, the exchange had previously expressed an interest in targeting commodity markets amid growing Chinese demand for raw materials.
With a strong balance sheet, the HKEx achieved net profits of $5.09 billion in 2011, on revenues of $7.86 billion, and daily turnover averaging $69.7 billion.
The group had reportedly been in talks with banks about a loan to finance a bid for the exchange before the announcement.
“If the need for additional financing in connection with that process arises, the board will explore and evaluate appropriate available sources of funds in accordance with the interests of HKEx’s shareholders. At this stage there can be no certainty as to the outcome of that process,” the HKEx board said on Monday
HKEx is the holding company for the Stock Exchange of Hong Kong, the Hong Kong Futures Exchange, is the clearing house for both exchanges, and is considered one of the front-runners in the race for the LME.
While it does not have the M&A experience of the other bidders, HKEx is thought to have the clearing expertise and the capital for future development.
Just as the HKEx is seeking to expand into commodities, so LME brokers and their clients are looking for access to the Asian and Chinese market, which is something that the Hong Kong Exchange could offer.
“A bid from the Hong Kong Exchange is probably more holistic and inevitably brings the China dynamic through which members can access China and make money for themselves,” Newedge broker John Browning told Metal Bulletin last week
The HKEx is a huge market. Its combination with the LME would be a global combination, tying up the western and eastern markets.
Martin Wheatley, head of the UK’s Financial Services Authority’s conduct business unit, will take over as head of new regulatory body the Financial Conduct Authority when it is set up later this year to oversee the integrity of the UK’s financial markets; how might his experience as former ceo of Hong Kong’s securities & futures commission shape his view of a bid by the Hong Kong exchange?
Will the reality of rapidly increased access to the Asian markets match the huge promise?
Would being bought by the Hong Kong Exchange facilitate the establishment of warehouses in China?
Would HKEx’s lack of warehousing experience impede its capacity to deal with LME warehousing issues?
Market capitalisation: $9.5 billion
Founded by the entrepreneurial Jeffrey Sprecher in 2000, the exchange, which has oil, gas and soft commodity contracts, bought the International Petroleum Exchange (IPE) in June 2001.
Trade in half of the world’s crude and refined oil futures takes place on ICE Futures Europe (which was created based on the IPE, whose open outcry trading pit Ice closed).
In common with CME, Ice has played an active role in exchange consolidation in recent years, losing out to CME Group in the battle for the Chicago Board of Trade in 2007, the same year it was successful in buying the New York Board of Trade.
Last year it withdrew from a joint bid for NYSE Euronext with Nasdaq.
Ice started clearing energy futures in Europe in November 2008 through ICE Clear Europe.
In February it said it had a $1.8 billion credit facility, which would enable it to fund a bid.
Ice launched its own clearing in 2008 to take control of an essential service for exchanges, their users and clients: the path which the LME is now taking, though its own clearing house is not due to be built till 2013
“I believe that they [the LME] could use a much better clearing infrastructure. That would allow them to roll out more products more quickly. If they can get a more general distribution it would be a good thing for them,” Sprecher said in the company’s fourth quarter results announcement in February
But he has also pointed to the fact that the LME has benefited from strong growth in Asia, where Ice itself does not have a strong foothold yet.
Some argue that Ice’s focus on developing a corporate franchise would make it the best fit for the LME and its users.
Though it clears some iron ore swaps it does not offer any other metal contracts, so buying the LME would be a blockbuster entrance to a new market for the Atlanta-based exchange.
What does its closure of the IPE trading pits suggest for the future of open outcry at the LME, if Ice were successful?
Is Ice’s current lack of metal contracts positive, negative or neutral?
Market capitalisation: $6.6 billion
NYSE Euronext is the owner of stock exchanges
in Amsterdam, Brussels, Lisbon, London and Paris, and through its NYSE Liffe platform, it is also runs the second largest derivatives market in Europe.
NYSE Liffe offers soft commodities derivatives and maintains a warehousing network for the physical storage of wheat, cocoa and coffee. The group has developed NYSE Liffe Clearing for the London derivatives market, though certain clearing functions are outsourced to LCH.Clearnet. The company aims to bring those services in-house by mid-2013.
NYSE Euronext views the LME as a good fit for its existing commodities business: it has experience running a warehouse network and, like the LME, it is keen to develop its own clearing house.
New regulations in Europe look set to transform the derivatives market over the next few years, and a far larger percentage of over-the-counter business will need to be centrally cleared. It will not have gone unnoticed that, when the new fee structure is in place, the LME’s clearing house project will be self-financed
The group is also eager to diversify ahead of the introduction of the new Markets in Financial Instruments Directive (MiFID).
Acquiring an exchange like the LME will provide diversification and growth in trading volumes, possibly without attracting too much attention from regulators, which blocked NYSE Euronext’s bid for Deutsche Borse last year due to anti-trust concerns.
The weaker derivatives market in Europe hurt NYSE’s first-quarter earnings, with trading volumes falling 28% year on year. The group restated its aim of pursuing earnings growth when announcing its results, and capitalising on opportunities in new markets is the first pillar of that strategy.
After incurring $16 million in charges related to the Deutsche Borse bid, NYSE will want to avoid another failed takeover attempt. With estimates for the value of the LME varying widely, how far will NYSE go to avoid being muscled out of the bidding?