LONDON, Jan 20 (Reuters) - London Metal Exchange (LME)
trading volumes contracted for the third consecutive year in
2021, extending a broader decline that dates back to 2015.
However, there are glimmers of hope for the 145-year-old
grand dame of industrial metals trading and its owner Hong Kong
Exchanges and Clearing (HKEx).
The COVID-19 hit to trading activity appears to have passed
with monthly volumes growing again over the second half of the
While some contracts show signs of terminal decline, the
exchange continues to grow its footprint in the steel trading
And while HKEx has struggled to realise its original
ambitions when it bought the London market in 2012, the Hong
Kong exchange seems to have struck gold with its own suite of
LME trading volumes slid by 6.0% last year but the headline
fall in activity is slightly misleading.
Strip out UNA trades, a compliance work-around that has
become noticeably less popular after the exchange started
charging fees on them, and the decline was just 4.7%. Adjusted
for the number of working days last year, the year-on-year fall
narrows to 4.3%.
Moreover, 2021 was very much a year of two halves for metals
trading activity on the London market.
Volumes started trending sharply lower around the middle of
2020, when the disruptive impact of COVID-19 was spreading in
full force around the world.
That slump extended to May 2021, since when LME volumes have
shown signs of stabilising and growing again.
It's helped that metals prices have rallied hard from their
coronavirus lows in the first quarter of 2020. That's rekindled
interest from investors who fled the sector over the prolonged
downturn in the first part of the last decade.
MICRO OR MACRO?
HKEx has struggled to define a coherent strategy for its
London purchase and it's tempting to see the decline in volumes
since 2012 through the prism of the internal frictions that have
characterised the relationship.
These have most recently centred around the fate of the
LME's iconic open-outcry trading ring, which resumed in
September after an 18-month hiatus but in reduced form https://www.reuters.com/world/uk/most-lme-floor-members-return-when-ring-trading-restarts-september-2021-08-16.
However, it's impossible to separate out the micro from the
macro forces at work in the metals trading universe.
The tie-up with the LME came just after the peak of the
previous price cycle and the simultaneous peak in investment
activity in the metals complex.
Many funds got burnt in the subsequent multi-year downturn
which played out until 2016 and it's only recently that the
broader speculative community has re-engaged with industrial
Even now macro influences are at work in individual markets
such as copper.
The LME's copper contract saw a 6.9% decline in activity
last year, making it the second worst performer among the
exchange's core base metals products.
But CME copper volumes have suffered as well. After
collapsing by 27% in 2019, copper futures activity on the U.S.
exchange has registered anaemic growth of just 1.3% and 1.1% in
2020 and 2021 respectively.
The combination of high prices and low stocks has dampened
copper activity https://www.reuters.com/markets/commodities/no-new-year-resolution-out-of-favour-copper-market-2022-01-17
across all three global trading venues.
Tin saw an even sharper 15% decline in activity last year
but that has to be seen in the context of super-low stocks -
less inventory to be rolled through the LME's complex prompt
date system - and super-high prices - deterring fresh trading
WINNERS AND LOSERS
Some of the LME's contracts seem in danger of falling by the
wayside, particularly the two aluminium alloy contracts.
The North American product has experienced dwindling volumes
every year since 2015 and activity slumped by a further 84% in
2021. The rest-of-the-world alloy contract has seen trading
dwindle from 61,700 lots in 2019 to just 7,044 last year.
Cobalt is another contract in danger of losing its relevance
with activity diving from 9,600 lots in 2019 to 841 last year.
A new index-linked cobalt contract has so far not traded, in
stark contrast to the CME's offering which notched up 3,397 lots
of activity in its first full year of trading.
Also missing in action among the LME's new products are the
lithium and used beverage can contracts, although it's worth
noting that the CME lithium contract has also failed to gain any
real traction with just 13 lots traded since its May 2021
However, the LME has seen more success with other new
launched such as its European aluminium premium contract, which
registered 9,194 lots of activity in its first six months of
Similarly, three new steel contracts - European hot-rolled
and Indian and Taiwan scrap - all saw some action after launch
in August last year.
HKEx' original ambitions to link the LME with the mainland
Chinese market-place have been stymied by a lack of interest
from China's exchanges.
However, it has struck somewhat unlikely success with a new
suite of mini base metal contracts aimed squarely at the retail
The LME tried and failed with similar products twice and
HKEx's own yuan-denominated mini contracts have gone quiet after
an initial flurry of interest when they were launched at the end
But its dollar-denominated minis are thriving, volumes
across the six contracts more than doubling to 417,545 lots last
year. That's still a far cry from the huge speculative volumes
characteristic of the Shanghai Futures Exchange and other
mainland exchanges but it's an interesting development.
Not least because something similar is happening on the CME.
While its high-grade copper futures contract has seen activity
flat-line over the last two years, trading on its mini copper
contract exploded by 330% to a record 59,580 lots in 2021.
That suggests that industrial metals have moved back on to
the broader investor radar, a positive sign for both the CME and
The opinions expressed here are those of the author, a
columnist for Reuters
(Editing by David Evans)