London Metal Exchange expected to wave white flag on fees: sources

Men walk past the London Metal Exchange in London.
Men walk past the London Metal Exchange in London.PHOTO: REUTERS

LONDON (REUTERS) - The London Metal Exchange is expected to cut some trading fees, in a bid to arrest sliding volumes, but lower costs are unlikely to convince those already using cheaper alternatives to return, metals industry sources say.

Volumes on the 139-year-old exchange have been falling since trading fees were hiked an average 31 percent in January 2015. The drop has accelerated this year; in the six months to end-June volumes are down nearly 9 per cent from the same period in 2015.

Much of the drop is due to some core clients such as producers and consumers moving to rival exchanges or using over-the-counter contracts.

Some brokers netting trades during the day to limit the amounts they put through the LME are also draining volumes.

Metal industry sources said LME officials are privately conceding that across the board hikes were a mistake, that moves were afoot to limit the damage and the idea of a rival exchange announced in June could accelerate the process. "Fees are being discussed, they realise they need to do something before the situation gets any worse," one head of a metals brokerage said. "I'm not sure cutting fees will persuade people to go back, people who turned to OTC went from paying huge LME fees to paying no LME fees."

Expectations of fee cuts were reinforced in June. Charles Li, chief executive of Hong Kong Exchanges and Clearing , which bought the LME for $2.2 billion four years ago, said the exchange was open to discussion

LME Chief Executive Garry Jones also said falling volumes could be linked to higher fees. "We stated during LME Week Asia (in June) that we were open to discussion with members on these issues and these discussions are ongoing," an LME spokesperson said.

Sources say they have no details about timing, scale, contracts and whether clearing fees could also be cut, but some believe the exchange could act before LME Week in London, which starts at the end of October. "They've taken too long, people who have moved on won't come back, they've found cheaper ways," a commodity trader said. "They told me a year ago they were going to look at finessing the structure. They raised fees for all trades, when they could have taken a more granular approach." The root of the problem is so-called tom/next trading - buying tomorrow and selling the day after - used by consumers and producers to manage short-term mismatches, which before January 2015 did not incur fees.