Commodities & Futures: High stock levels are testing LME's mettle

WHETHER blinded by one too many G&Ts or mesmerised by the crowds, few of those converging on the Grosvenor House hotel for the annual London Metal Exchange dinner this week will have the vision to see where the metals industry is heading.

The international metals industry has had a miserable few years. Global economic recession has been compounded by the break-up of Eastern Europe. The collapse of the command economies has resulted in thousands of tonnes of unwanted metal arriving in the West - and a fair chunk of this at the doors of the LME, whose prices they are following.

The exchange may boast that its turnover is up again this year - by 40 per cent on last year's (unreleased) figure - making it the exchange's sixth consecutive year of growth, but this is certainly no time for celebrations. Martin Abbott, marketing director of the LME, admits the massive increase in turnover is largely due to the unprecedented high stock levels. Financing and trading the stocks is keeping business brisk. But 1.38 million tonnes of aluminium, 302,450 tonnes of copper, 376,500 tonnes of zinc, 177,950 tonnes of lead and 52,728 tonnes of nickel in LME warehouses weigh heavily on the industry the exchange is dependent on. 'The exchange is healthy,' Mr Abbott said. 'But as for the profitability of our members - few can be booming now.' Asked what mood to expect this week, he replied: 'There will be an element of depression, but also a sense of confidence in the bedrock of the business. It is not going to disappear. It will survive until the good times come back.'

So the incoming LME chairman, Raj Bagri, chairman of Metdist Trading, can expect to take over the job in precarious times when he picks up the mantle from John Wolff on 1 January. Mr Wolff's departure from the exchange, after he resigned from his family firm, the LME broker Rudolf Wolff, last month, is a fair indictment of the changing times. Rudolf Wolff, the founder LME trader, was taken over by Noranda, the international mining conglomerate, in 1981 and an eventual parting of the ways was pretty much inevitable. The Wolff case is a classic example of the new wave of conglomerates and bankers gobbling up the old- established independent broker. Another example of this is the recent acquisition by Metallgesellschaft of Charles Davis, the ring dealer, while Barclays Metals entered the arena a few years ago by buying Deak International. There is also a growing, and in some cases worrying, influence off the ring through bank and fund management trade and speculation. Certainly, the LME owes much of its high turnover to the fund managers' interest in metals futures. Speculation and technical trading have kept prices and activity at a height fundamentals would not have achieved.

But the recent sterling crisis and deepening economic malaise have taken the fizz out of the bankers' new-found sparkle. A fourth quarter that should have heralded the first signs of economic recovery and the return of the hesitant metals consumer has been a bitter disappointment for the industry.

A positive upshot from the recent economic upsets is that the exchange is likely to start quoting its flagship copper contract in dollars and not sterling - a long-awaited move. The sterling crisis made it clearer than ever that a single- currency exchange (in the LME's case the dollar) would help eradicate undue volatility. With this in mind the exchange is reviewing the issue. According to one LME broker veteran: 'There is a huge pressure group lobbying for a dollar copper contract. Everyone wants this after the ERM crisis. It is a conceded victory (that the dollar lobby will win).'

However, one factor likely to crumple the brows of the old guard is the 'value- for-money' aspect of the exchange. Our veteran LME ring dealing broker said: 'There used to be a benefit from being at the centre of things. Now a large volume is traded off the ring. The advantages of being a ring-dealing member are being questioned. There has been more public discussion on this in the last six weeks than since the tin crisis in 1985.' Naturally, it is much more expensive to staff a team on the ring, including LME fees and salaries, than it is to be an associate member or off-ring trader.

The LME, for its part, is addressing the issue, not least because its core of full-ring dealing members has shrunk to 16 from 27 in 1986. The board has commissioned a working committee, comprising its external directors, to study and report back on the existing membership.

David King, chief executive of the exchange, said last week: 'The board is ever mindful that the centre of gravity of trading in LME's market place should be focused upon the market floor, and that this is where the functions of liquidity and transparency are largely concentrated and best served.'

Additionally, Billiton International, which owns the ring dealer Billiton-Enthoven Metals, recently voiced concern about the risk exposure and cost of ring trading.

So, all in all, testing times for the metals fraternity. Few will be drunk on the heady feeling of success as they network the cocktail parties, dinners and lunches this LME week. And, unfortunately, they will not have the consolation of the London metal trader Wogen Resource's 'heart- starter' - the notorious morning-after LME dinner date.

The scantily-clad hostesses who usually serve revitalising bloody marys to flagging metals traders will not be appearing this year. Wogen thought it more appropriate to sponsor the Westminster Abbey Christmas concert on 10 December in aid of the Westminster homeless. Let's hope God is listening.