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COMMENT: 'Certain parties' and the future of the LME


You produce and trade copper in China, the country that is the world's largest producer and consumer of the red metal.

Copper prices in the global market turn, to a large degree, on investors' anticipation of demand in the market that you are most plugged into.

Yet physical demand is poor and your domestic market is trading in a contango, while the global market is trading in a backwardation, suggesting a nearby tightness of metal.

And it is not easy if you want to deliver into that backwardation, since the LME's nearest warehouses are in South Korea.

A large portion of your domestic contract sales are transacted basis renminbi prices on the Shanghai Futures Exchange, while your concentrate intake has in recent weeks been priced $700 per tonne higher on the LME.

In short: you are at the centre of the world's most important market but your capacity to affect prices is limited.

Your friends in companies such as Jiangxi Copper, Xiangguang Copper and members of the China smelter purchasing team have therefore pledged to deliver 100,000 tonnes of metal to LME warehouses in South Korea.

In doing so they attempted to send a shot across the bows of "certain parties", which they argue have distorted the copper market for the reasons outlined above.

You may also know someone who is trading the copper market on a large and professional basis.

His sense of the global market — with its warehouse queues in aluminium, its backwardation in copper and the experience of MF Global going bankrupt — is that it is one in which he operates at a disadvantage to the major western banks, producers and traders.

They appear to know and act a fraction before him.

It is understandable therefore that your friends have taken aim at "certain parties", but you must also acknowledge that the cause of this inefficiency in the global copper market is, in part, the restrictions that still exist for market participants wanting to operate - by setting up warehouses, for example - in China.

As the end-game for possible purchasers of the LME approaches, with a deadline for bids on May 7, such issues must be on the minds of bidders, shareholders and users of the market, in China and outside it.

The four exchanges that have all expressed a serious and reciprocated interest must have two components to any bid: the financial package and the proposal.

For the latter part of the bid the CME Group, InterContinental Exchange and NYSE Euronext will offer serious considerations such as turnkey clearing, modernisation and access into other commodity markets, and plans for global expansion.

The Hong Kong Exchange will offer the enticing prospect of a path into China if and when the process of liberalization gradually opens the market there up.

There is some uncertainty as to whether the owners of brokerages in New York and London would be ready to accept a bid from Hong Kong.

But it is equally unclear whether the other exchanges can make a really compelling argument about their capacity to power the LME’s expansion in the world’s most exciting market.

Over to the board, and the shareholders...

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