CME Group Looks to Challenge the Venerable London Metal Exchange

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Source: Adobe Stock/luzitanija

The fact the CME Group is looking to expand its warehouse network should come as no surprise, the fact it has taken it so long to do it should.

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The market has been ripe for CME to expand the physical delivery locations for the metals it trades in the wake of the last few years furor over long load-out queues at certain London Metal Exchange warehouses across the U.S. and Europe.

LMEring_550

Should the CME Group add a physical trading ring with red couches? Source: London Metal Exchange.

If the CME had a wider network with more tonnage in storage five years ago then, arguably, some of the LME warehouse operators would not have been able to game the system to the extent that they did. The recent launch of zinc and lead contracts by the CME has presumably been a spur to add more locations. Zinc was added last year and lead followed earlier this year.

Dynamic Approach

Yet, a new dynamism in the CME’s approach in recent years is also in evidence. The CME clearly has intentions to take on the older LME’s dominance of the physical trade market, particularly outside the CME’s home base of the U.S.

Even so, the CME has a lot of catching up to do. The exchange currently has 24 warehouses in its network for physical delivery of metal, mostly in the U.S. but there are three in Europe. The intent is to expand the U.S. and European network in addition to adding Asian locations.

Formidable Competition

The LME in contrast has 600 approved warehouses in 37 locations around the world, a dominance it is not about to lose anytime soon. However, competition is generally a good thing for efficiency and innovation. The ambitions of the CME will almost certainly result over time in a more dynamic LME which is to be applauded.

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Consumers, meanwhile, are finally being given a real choice of where to hedge and trade metal, particularly consumers in North America. Long on the receiving end of market distortions way beyond their control, it is about time consumers and processors gain access to not one but two competing and progressively more dynamic markets, in the end this will be to the benefit of us all.

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