Part Two: LME chief Chamberlain considers life after nickel closure

Continued from Part One on October 4 in which Matthew Chamberlain discussed the LME's response to the nickel market closure in March 2022

Within the Action Plan, the LME has also accelerated its approval of new nickel brands, to ease any potential supply issues.

“With the fast tracking of new nickel brands, a big part of that is increasing that Class 1 nickel supply to the market to make it easier for participants to deliver against the contract,” Chamberlain says. “The more liquidity you create, the less chance you have of a delivery squeeze.

“Obviously we are still committed to having confidence in that delivery so our parallel consultation on including nickel powder as a deliverable shape is a good example of that. We have decided to pause that process after discussions with the nickel Committee, because, while it is a good idea, there were elements within that which presented difficulties for the physical market participants in actually delivering and using that.

“So the Action Plan actually has to be dynamic, and the indications we have had is that market users really appreciated the time and effort it took to get to that point.”

Another key component is the roll-out of LME’s volume weighted average price (VWAP) methodology for pricing its most liquid contracts. The exchange will extend it to the five prompt dates beyond the three-month contract for aluminium, copper, zinc, lead and nickel in a phased process starting next year, the LME said in September.

“The closing price has used a VWAP methodology for our most liquid three-month contracts since 2020 [when the Ring closed due to the pandemic]. What we are now proposing to do is extend it to other liquid monthly (third Wednesday) dates, they are very important as they are where most of our open interest sits,” Chamberlain says. “After consultation with our users and exchanging views, we felt that when it comes to things like spreads and multiple legs there was a consensus for a cautious approach so we have opted for a phased approach to give time to adjust and build algorithmic solutions and so on.”

That cautious approach extends to another proposal to integrate trade-at-settle (TAS) functionality in the closing price process.

Beyond these reforms, the exchange has also continued to focus on innovation. Its ferrous complex is up 55% year-on-year in the first eight months of the year, with an average daily volume of 3,291 lots. Its largest Steel Scrap CFR Turkey (Platts) contract is up 75% by the same measure. On September 6 the contract hit 5 million tonnes traded, the highest annual figure since the contract launched in 2015.

The LME also has an eye on extending its reach in “financial” or cash-settled markets.

“We have always says that we do well when our members are doing well,” Chamberlain says. “What we have seen in the first half of 2023 is that they have seen a combination of client activity and interest rate increases combine to provide a more supportive environment. We are certainly seeing inbound interest to do more with us or to take new memberships. At the client level, the global commodities merchants and physical hedgers have been more active. So there is a positive usage story overall.

“Obviously, the big untapped area for us is the financial side of the market. We do have financial participants but we feel that there is more liquidity that we could bring from that type of player, so that is where we have the most to do in terms of product development.”

That growth opportunity is tied in with China and the importance of Chinese venues in the commodity market. There, the exchange has ambitious plans to develop its sales and technology footprint. Chamberlain, who was already a member of the management committee at HKEX Group and its group head of commodities, took in early 2023 oversight of the Qianhai Mercantile Exchange and development of then Hong Kong group’s global commodity products.

“Within HKEX, our vision of a global commodities model is a key part of what we are trying to do,” he added. “As part of that we have absolutely stepped up our presence in China. Obviously that was more difficult during the pandemic but we are now in a position where that has been taking place and it has allowed us to reactivate the opportunity given our natural advantages in the region. Our existing footprint in Hong Kong, Shanghai and Beijing gives us the opportunity to leverage that competitive advantage.”

Alongside that push, the LME is in the process of upgrading its trading platform, with new versions of its electronic LMEselect and LMEsource market data platforms set to go live in the second quarter next year, and a new graphical user interface called LMEtrader in testing.

“We will have a robust matching engine that is customised for our market, native TAS functionality and a route to mass quoting/mass cancel,” Chamberlain says. “The latter is absolutely crucial for our options market – right now that is predominantly a voice-based market, there is very little electronic options activity. We think we could really unleash a lot of new business if we had an electronic options market and we know the options market makers are interested if we can give them the right technology setup.

“As well as the platform upgrade, we also have an event streaming platform that will reduce the reliance on point-to-point connections that can create vulnerable points in terms of resilience. The way messages get moved around should be much more robust. So the new platform works on that basis and over the coming months and years we will put all of our systems on that, and we believe that will be the biggest driver of further enhancing operational resilience. That is sometimes less visible but a critical part of our technology strategy.”

Having pioneered responsible sourcing and pushed to make that data discoverable electronically, an industry shift to sustainability has helped the LME galvanise adoption.

“With sustainability it’s not a moral choice that we are making, it’s something that we absolutely have to do if we are going to remain relevant,” he says. “Our experience with responsible sourcing made it very clear to us that we had to be part of this process, and we are now in a position where by the end of this year every brand listed on the LME will have had to submit their first compliance submissions to demonstrate their compliance with the phased set of requirements we have been implementing over the last five years.”

Two years ago, the LME launched LMEpassport, its digital certificates of analysis and sustainability credentials register. It now has 219 brands signed up.

“The physical metals industry has always been a very manual industry, and now people are recognising the value of digital solutions to make their lives easier,” Chamberlain says. “The strides we have made with LMEpassport make a host of information visible and trackable on that individual metal basis, so that will be very useful as you track key metrics like emissions use. I’m really passionate about this providing the right solutions for those needs as they develop.”