Chinese state-owned giant warns of “disaster” of London Metal Exchange reform plans

China’s enormous state-owned metals trading corporation today declared the London Metal Exchange’s sweeping changes including closing its famous open outcry trading floor would be a “disaster” and could drive trading out of the UK to Shanghai.

The LME has provoked uproar by putting forward plans in January to close its historic face-to-face trading floor known as the Ring and change the way the market offers credit to customers.

The Evening Standard last week documented the huge opposition to the plan from brokers and their customers in the metal buying and selling world, including the main trade association for the mighty German metal industry which supplies its carmakers and other manufacturers.

Today, it emerged that Minmetals - the largest iron and steel trader in China and one of the biggest metals and minerals traders in the world- has forcefully declared its opposition.

Minmetals’ anger at the plan is particularly telling given that the LME is now owned by Hong Kong Exchanges and Clearing, whose biggest shareholder is the China-influenced Hong Kong government.

Minmetals is particularly opposed to plans to shift to a system making customers settle their theoretical margin losses on trading every day. Currently, the market keeps losses and profits of clients’ trades and allows them to settle up as their contract comes to an end, which could be months ahead.

Minmetals UK managing director Liangmin Gu said the change to the margin methodology would have a “huge” effect, increasing  costs and making the LME less competitive against its peers.

Speaking at the Fastmarkets Copper Seminar, he said: “From the Minmetals perspective, a change [as the LME was proposing] would be a disaster for LME credit provision.”

Praising the existing system, he said: “This provision has proven to be a feature and special priority in the global market, and the effect on LME participants such as Minmetals, a highly reliable and credible fiscal hedger, would be huge.”

He said the LME would lose its competitive edge particularly to the Shanghai International Energy Exchange.

He added: “In fact, our dealing costs have been accumulating since the LME was acquired by Hong Kong Exchanges & Clearing [in 2012], and after several years you can see the cost increase very easily. However, compared with the change of margin methodology, the strike on us would be much, much bigger -and unacceptable, I’m afraid.”

His words echoed those of the Verband Deutscher Metallhandler(VDM) association which said the proposals were so bad that they betrayed the market’s apparent lack of understanding of how its own members operate.

He added that the LME’s open outcry trading, conducted in a circular dealing space called the Ring, was better than trading electronically.