LME Gives In to Renminbi; Chinese Non-Ferrous Metal Warehouses Next?

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Non-ferrous Metals

The focus has been on the LME’s recent announcements concerning LME aluminum warehouse load-out rates and what influence, if any, the LME can have on the high physical premiums that have developed in recent years (and distorted price discovery via the LME), but another announcement made last month is also worthy of note.

The LME confirmed they would offer clearing of metal contracts in Chinese Renminbi in addition to the current options of US Dollars, Euros, Yen and Sterling, once they commence clearing through their own clearing house in September of next year. A recent post in Procurement Leaders suggests the move is a symbol of the quasi-exclusive status of the US dollar, but interesting as this point of view is, it over-dramatizes a natural evolution in global trade.

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When one country in the world rises from consuming less than 10% of annual metals traded to around 40% in little more than a decade, it is hardly surprising that markets should respond to that shift in facilitating settlement of those trades in their own currency. The LME has told MetalMiner that contrary to the article above, they have no intention of dropping sterling as a settlement currency and that all trades will continue to be made in US dollars; the settlement is merely to allow payment in the buyers’ currency (or receive settlement in the sellers’ currency).

The Chinese will increasingly turn to the LME for hedging services, but with an active market of their own in the Shanghai Futures Exchange covering aluminum, copper, lead and zinc, they already have the opportunity to hedge certain metals on the domestic market in RMB. Most metals consumers inside China do not access the LME – it is the larger corporations, many of them state, with the approval to do so.

LME Warehouses in China?

Indeed the threat, if there is one, is to the SHFE from the LME, should the latter achieve approval to open warehouse facilities in China, a development the LME’s new owners are fervently hoping will become reality within a reasonable time-frame. China is the LME’s greatest growth opportunity with the potential to access a vast number of metal-producing, consuming and processing companies – if only they could also provide delivery locations.

That’s the new owners’ (HKEx) objective, and has been one of the drivers behind trying to sort out the warehouse queue fiasco in recent months. Beijing is rumored to have told the LME that approval will not be given for warehouse licenses until they have their systems sorted out. Whether they will consider LME’s latest plans as sorting out the problem will, in part, be determined by whether queues drop to manageable proportions and distortions like the high physical aluminum delivery premiums return to historic levels, more reasonably reflecting simple logistics cost.

No warehouses for now, then.

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