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Screenshot of a breaking news alert e-mail from Q2 2017
Globally, base metal trading has expanded since the sale of the London Metal Exchange (LME) to the HKEx. Taking the two main exchanges for base metals – the LME and the Shanghai Futures Exchange (SHFE) – the average monthly volume of the six main base metals rose 23.8% since July 2012. At the same time, the LME share of the trading has fallen from 89.7% in July 2012 to 77.8% in June 2016, even taking out the double-counting of Chinese contracts.
The LME has lost its position due both to self-imposed measures, the growth of other exchanges, and the shift in the globally center of manufacturing to East Asia. The LME’s ‘Achilles Heel’ is its lack of Chinese warehouses. This is unlikely to be resolved, so the declining dominance of the LME’s prices is destined to continue. Europe and North America suppliers will reference the LME, but, elsewhere expect to increasingly see contracts quoted against “SHFE” prices.
This is not necessarily bad for purchasers. An SHFE price will be the most representative price for material purchased and used in China. However, it does provide challenges. While the LME has historically focused on physical users, and now, increasingly on institutional buyers, the SHFE has been a more accessible to all and allowed retail customers an option to speculate.
Better regulation, transparency, and its structure mean the LME will remain the main global price benchmark for the foreseeable future. That said, the slow transition to a bipolar market has already begun in earnest. Today, IHS provides feeds of both exchanges’ spot and contract prices, but the Pricing and Purchasing Service expects to increase analysis of SHFE prices as the importance of the exchange increases.