LME considers its first warehouse in the U.S.

The venerable London Metal Exchange (LME), having reached out to the Far East, may soon be making its physical presence felt in North America.

The exchange, with 97-98% of its activity generated outside the United Kingdom, will extend its international warehouse network to Japan in July, 1989, for trading in aluminum and is currently negotiating for warehouse facilities in the United States for aluminum and nickel contracts.

“What is stopping us from being truly international is warehouse delivery points,” LME Chairman Christopher Green told The Northern Miner recently in an interview. Green, on a trip around the globe which took him to Australia and Japan, was returning home via Canada where he was to deliver a paper at a private conference at Queen’s University in Kingston, Ont. dealing with free-market pricing.

By expanding its warehouse network, which spread from the United Kingdom to Europe and a few years ago to Singapore in the Far East, the LME, which has been operating for more than 110 years, is hoping to make the market more responsive to squeezes and surpluses, Green said.

As a commodity exchange, an institution such as the LME provides a marketplace for free and open pricing, both for cash (spot) settlement and one futures contract for 3-month delivery. While its prices serve as a guideline for the basic value of a commodity, an exchange allows a company to hedge its investment against negative price movements. Comex competition

In the U.S., the LME will face competition from the New York Commodity Exchange (Comex), which, among its base-metal contracts, is heavily involved in copper trading.

“We’ve no intention of doing business with Comex on that score,” Green said, explaining that in addition to aluminum and nickel stocks for its U.S. warehouses, the LME may pursue lead and zinc.

LME policy is that the exchange does not own warehouses; rather, warehousing companies apply to the exchange to operate as a LME warehouse.

Part of the trick of establishing warehouses is to locate the facilities in an area where net consumption tends to be greater than net production, Green explained. The Singapore warehouse, performing beyond expectations, “has proved to be extremely active,” he said, pointing out that that country is surrounded by metals-consuming nations. Higher metal prices

A bull market in base metals this year has brought the LME more into the world spotlight. Nickel, in particular, which the major producers have tended to sell directly to clients (making for thin trading of the metal on the exchange), reached an unheard of $10.84(US) per lb on the LME during the first half of the year. Average price of the metal this year is topping $6, which compares favorably with an average of $2.21 last year and $1.76 in 1986.

Past criticism of the LME, especially in the case of a metal that is thinly traded, has often been along the lines the LME price does not reflect supply and demand and that price swings are exaggerated. The run-up of prices experienced this year, however, seems to have the critics singing different tunes; giant nickel producer Inco Ltd. (TSE), for one, has been making noises about the need for price stability, to the benefit of both producer and consumer, and is looking much more approvingly on the LME than in the past.

Greater usage of the LME is a recognition of the long-term advantage of a free-market pricing system and the best way to sell the metal, Green said.

“Producers may complain about the volatility of the market, but sometimes they contribute to that volatility,” he said.

Part of his job as LME chairman, Green believes, is to make the management of the exchange more aware of global events, and to this end he has proposed the formation of an international liaison group comprising 8-10 members from different areas of the world.

The group, he said, would meet with LME board members to discuss a variety of issues, such as how the exchange might improve its services. “We need to get more international feedback,” Green said.