The venerable London Metal Exchange is exploring the idea of selling itself. The rumor blossomed into fact Friday, when the LME announced that it had received multiple expressions of interest and would begin the formal process that might lead to an acceptable offer.
The LME declined to identify potential suitors, so that rumors are now swirling anew as to which acquisition-oriented exchange might be interested. Moelis & Co, the US investment bank hired to advise the exchange, also declined comment.
Those thought to be eyeing the landmark London institution include the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE). Both exchanges have been on an acquisition track. The CME, now described as the world's largest futures exchange, finally won supremacy in US precious metals futures trading (and broadened its energy markets) when it acquired the New York Mercantile Exchange (NYMEX) and its COMEX precious metals division in 2008. ICE acquired the New York Board of Trade in 2007. It has been noted that the CME and ICE would be able to handle in stride an acquisition of the much smaller LME.
A number of Asian exchanges may also be interested in the LME. The Singapore Exchange (SGX) has been mentioned, in particular. The two exchanges have worked together to offer base metals futures on the SGX. The latter tried to acquire the Australian Securities Exchange (ASX) in April but was blocked by the Australian government. Some market observers have suggested that any of the Asian exchanges, which typically have a presence in commodities, might jump at the chance to acquire the LME and the international cachet that would attend the transaction.
The LME, which is owned by its 92 members (primarily banks and commodities brokers), is estimated to be worth close to $250 million, based on the most recent published price of its closely held shares. But an acceptable bid offer would likely have to be significantly higher.
If a sale happens, it remains to be seen whether, in the opinion of some, the LME's focus would shift toward the financial sector and away from industrial users of the metals it trades.
A record 108,708 trades were transacted on the LME Friday, smashing a previous record set just a day earlier. The exchange has been averaging 565,639 lots per day year to date. (LME open outcry transactions are conducted in lots, with the size of a lot varying from five to 65 tonnes according to the metal or metal product traded. Smaller contract sizes, known as LMEminis, have been offered since February for a limited number of metals.)
The precious metals world may revolve around the CME/NYMEX/COMEX or the London Fix (precious metals prices set twice daily by members of the UK-based London Bullion Market Association, or LBMA), but much of the rest of the metals world is fixated on the LME. The exchange has been the world's premiere base metals market for most of its 134-year history and now accounts for about 80% of the trading volume of all metal futures globally.
For much of its existence, the exchange focused on the big five major-tonnage nonferrous metals: copper, zinc, lead, tin and aluminum, with nickel a relative newcomer-being added to the mix only a quarter-century or so ago. An aluminum alloy contract was added a little later. More recently, however, the LME has introduced new metals futures and options contracts that in the past might have been considered exotic-steel billet in 2008, with cobalt and molybdenum added last year.
The LME has even gotten involved with precious metals to an extent, helping the LBMA to produce forward curve rates for gold and silver, and aiding in the clearance of over-the-counter gold transactions. The exchange uses Europe-based LCH Clearnet to clear trades but recently began exploring the possibility of taking greater control over its own clearing activities.
Chris Munford researches and writes about commodities, with an emphasis on metals and energy. He is based in the New York area.