LONDON, Jan 20 Reuters London Metal Exchange LME trading volumes contracted for the third consecutive year in 2021, extending a broader decline that dates back to 2015.
There is a glimmer of hope for the 145 year old grand dame of industrial metals trading and its owner Hong Kong Exchanges and Clearing HKEx The COVID 19 hit to trading activity appears to have passed with monthly volumes growing again over the second half of the year.
The Hong Kong exchange seems to have struck gold with its own suite of metals contracts, as HKEx struggled to achieve its original ambitions when it bought the London market in 2012.
The headline fall in activity is slightly misleading, as LME trading volumes fell by 6.0% last year.
The compliance workaround that has become noticeably less popular since the exchange started charging fees on them has become less popular, and the decline was just 4.7%. The year-on-year decline narrows to 4.3%, based on the number of working days last year.
In 2021, there were two halves for metals trading activity on the London market.
Volumes started falling sharply around the middle of 2020, when the disruptive impact of COVID 19 was spreading in full force around the world.
Since then, LME volumes have shown signs of stabilising and growing again, the slump continued to May 2021.
It has helped that metals prices have rallied hard from their coronavirus lows in the first quarter of 2020. Investors who fled the sector over the last decade have been interested in the new round of investing, as a result of the prolonged downturn in the sector.
HKEx has struggled to define a coherent strategy for its London purchase, and it is tempting to see the decline in volumes since 2012 through the prism of internal frictions that have characterised the relationship.
These have most recently centred around the fate of the LME's iconic open-outcry trading ring, which resumed in September after an 18 month hiatus, but in reduced form https: www.reuters. It is impossible to separate the micro from the macro forces at work in the metals trading universe.
The tie-up with the LME occurred just after the peak of the previous price cycle and the simultaneous peak in investment activity in the metals complex.
Many funds were burnt in the subsequent multi-year downturn which played out until 2016 and it's only recently that the broader speculative community has re-engaged with industrial metals.
In individual markets, such as copper, macro influences are at work.
The copper contract of the LME saw a 6.9% decline in activity last year, making it the second worst performing among the exchange's core metals products.
CME copper volumes have suffered as well. After collapsing by 27% in 2019, copper futures activity on the U.S. exchange has increased by just 1.3% and 1.1% in 2020 and 2021 respectively.
The combination of high prices and low stocks has dampened copper activity at www.reuters. Com markets commodities no-new year-resolution-out-of- favour-copper market - 2022 -- 01- 17 across all three global trading venues.
Tin saw an even sharper 15% decline in activity last year but that has to be seen in the context of super-low stocks - less inventory to be rolled through the LME's complex prompt date system and super-high prices, which has deterring fresh trading activity.
Some of the LME's contracts seem to be in danger of falling by the wayside, particularly the two aluminium alloy contracts.
The North American product has suffered dwindling volumes every year since 2015, and activity fell by a further 84% in 2021. The rest of the world alloy contract has seen trading drop from 61,700 lots in 2019 to just 7,044 last year.
Cobalt was in danger of losing its relevance with activity dropping from 9,600 lots in 2019 to 841 last year.
A new index-linked cobalt contract has not been traded so far, in stark contrast to CME's offering which had 3,397 lots of activity in its first full year of trading.
The used beverage can contracts and the CME lithium contract haven't really gained traction with just 13 lots traded since its May 2021 launch, which is something that is missing in action among the LME's new products.
In its first six months of action, the LME has had more success with other new products such as its European aluminium premium contract, which had 9,194 lots of activity.
Three new steel contracts -- European hot-rolled and Indian and Taiwan scrap -- all saw some action after launch in August last year.
HKEx's original ambitions to link the LME with the mainland Chinese market-place have been stymied by lack of interest from China's exchanges.
The LME tried and failed twice with similar products and HKEx's own yuan-denominated mini contracts went quiet after an initial flurry of interest when they were launched at the end of 2014.
Volumes across the six contracts increased to 417,545 lots last year, more than doubled its dollar-denominated minis. It's an interesting development and it is still a far cry from the huge speculative volumes characteristic of the Shanghai Futures Exchange and other mainland exchanges.
Something similar is happening on the CME. The mini copper contract has seen activity flat over the last two years, but trading on its mini copper contract increased by 330% to 59,580 lots in 2021, a record for the company's high-grade copper futures contract.
It shows that industrial metals have moved back to the broader investor radar, a positive sign for both the CME and the LME.
The opinions expressed here are those of the author, a columnist for Reuters.