LME Week: Amidst Copper Drop and Commodities Selloff, What to Expect in London

Now that October’s here, the world’s premier metal event is upon us — LME Week, held in London. Top metal producers’ executives think Rio Tinto, BHP Billiton, Codelco, etc. bankers, and traders get together, eat pricey hors d’oeuvres and booze it up amidst talking metals. For the producers, it’s mainly about keeping profits up. But with aluminum, zinc, nickel and perhaps most tellingly, copper all having dropped mainly due to Eurozone debt fears (among others), there’s industry-wide talk of cutting down supply to balance the market. What does the future hold in store for metals prices?

As the FT’s Javier Blas boils it down, this year’s LME Week, which began Sunday, has four big things on the horizon:

  • “The outlook for demand,
  • The potential for merger and acquisitions after the collapse in valuations,
  • The sale of the LME, and
  • Warehousing

The Demand Picture at LME Week 2011

To the demand point, Blas mentions that execs don’t think we’re headed for anything like the 2008 crisis, but the “upbeat tone is missing this year at the start of LME Week. Perhaps that has something to do with mining company share prices sliding. According to Dow Jones, the S&P/Toronto Stock Exchange Global Mining Index, which includes shares of BHP, Rio Tinto and Alcoa Inc., is down 26 percent so far this year. What these big guys want to ensure is this: that buyers of their raw materials and metals increase their orders this year (at best) or keep them at current levels (at worst). With the commodity selloff headlines of late and fears of global demand slowdown, we’ll have to see if either scenario happens.

As far as China’s role in global metals demand, Reuters recently dissected what its base metal demand will look like in 2012. The consensus is that a lot depends on how tight credit will be. Some analysts said that although many small to medium-sized firms had been de-stocking, the $6,000/ton threshold for copper may make them buy up considerable volumes again. Yang Changhua, a copper analyst at Chinese research firm Antaike, is quoted as saying Chinese copper consumption may rise to as much as 7.9 million tons in 2012, up from 7.38 million tons this year. Although copper, zinc, aluminum and tin demand overall are expected to be positive in 2012, the rate and degree of growth could be sorely underwhelming.

LME For Sale!

Of course, the biggest news heading into LME Week is the pending sale of the London Metals Exchange itself and, not least of which, how much money the sale could make Goldman Sachs, currently the largest shareholder (9.5 percent). The LME is valued somewhere between $1 billion and $1.6 billion. The Wall Street Journal reported that a sale is unlikely to happen until the first quarter of next year, according to LME Chief Executive Martin Abbott. Abbott went so far as to call the sale the “elephant in the room at the opening event of the week, the LME Metals Seminar, but interestingly shouldered the responsibility of figuring out the warehousing problem onto the US Fed and the country’s fiscal policy, according to the WSJ.

Goldman’s potential payout from the LME sale seems to go hand-in-hand with the role it has played in the warehousing stories that have played out over the past several months. Goldman owns a number of LME warehouses already, including the aluminum warehouses in Detroit where some 200,000 tons of the metal are in the delivery waiting line a nice source of profit. Also intriguing is that the Shanghai Futures Exchange (SHFE) has shown interest in buying the LME, according to the WSJ. If that sale were to go through, what would that mean for the two most important non-US exchanges for base metals (and their future relationship)?

Summing up the week to come, Tatyana Shumsky of Dow Jones Newswires quoted Bill Enrico, managing director at EMED Mining, a junior gold and copper mining company: “When you talk about LME week, I’ve been there during times of euphoria and times of fear and mass suicide, and frankly it is equally well attended.

–Taras Berezowsky

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