LONDON- It’s not the first time the 145-year-old London Metal Exchange (LME) has found itself in crisis.
There was the Tin Crisis of 1986, the Nickel Crisis of 1988 and what at the time was dubbed “The Sumitomo Scandal” but could now better be described as The 1996 Copper Crisis.
This year, however, is still something of a stand-out with not one but two tsunamis rocking the grand old dame of industrial metals trading.
March brought Nickel Crisis II, a much scarier update of the original, and now we have the unfolding Russian Metal Crisis.
Trading volumes have been sliding sharply since the nickel blow-out and there’s lingering uncertainty as to the future of the exchange’s iconic open outcry trading ring.
As metal traders gather for the annual LME Week festivities in London, it’s likely to be the state of the exchange as much as the markets that dominates the agenda.
The LME’s near breakdown in March mirrors the chaos that has been playing out in physical metal supply chains.
A highly globalized industry has been fractured by COVID-19 lockdowns, the ensuing turmoil in the global shipping sector and the geopolitical stress caused by Russia’s invasion of Ukraine.
Tin was the first to turn wild in February last year, the LME cash premium over three-month metal rocketing to an extraordinary $6,500 per ton.
Copper was next, the LME having to step in and impose backwardation limits in October as available stocks fell to 14,150 tons, enough to feed global demand for precisely five hours.
Such was the troubled backdrop to the Feb. 24 launch of Russia’s “special military operation” in Ukraine, which triggered nickel’s price melt-up and the near meltdown of the LME clearing system.
The status of Russian metal now poses a major dilemma for the LME, which has issued a discussion paper on whether to suspend Russian brands.
It’s perilous legal territory and would have a significant impact on LME price and physical premiums. But the risk is that unsold Russian metal floods into the market of last resort, transforming London pricing to Londongrad pricing.
The arrival of 271,800 tons of aluminum in LME sheds since the start of the month suggests a decision may have to be made sooner rather than later.
Turbulent times have called for special measures in the form of lending caps and price move limits across all the LME’s deliverable contracts.
They might be in place for a while.
The last time Europe saw equivalent military conflict, the LME suspended trading in 1941. Full service only returned in 1953 with the lifting of government price controls on zinc.
None of which will persuade either Elliott Associates or Jane Street Global Trading that the LME was right to cancel trades executed on the morning before it stopped nickel trading.
