Ringside seat: A day at the London Metals Exchange

04 May 2017

At the end of last month, I was watching a flurry of activity as the daily prices were set on the London Metals Exchange, one of the few open outcry markets left in the world.  It’s the best of both worlds – all the benefits of modern technology, but still drawing on the strength of human relationships and the power of trust. It was a real privilege to be at the Exchange with a group of around 20 metals and mining guests. We had representatives from every aspect of the industry, from mining, to processing and trading. Even though many of them were senior figures in the sector quite a few (like me) had previously never had the opportunity to be ‘in the Ring’ before.

Quite apart from the excitement of the activity below me, it was also fascinating to talk about the way the market operates and who uses it. Not just industry operators wanting to buy, sell and hedge the underlying commodities, but financial players looking to make money through trading and arbitrage. The latter can, of course, add additional intra-day and long term liquidity, and that, in turn can become a self-fulfilling prophecy, as greater liquidity produces more dealing opportunities.


After our visit, we had a round-table discussion about the current state of play in the metals market, which drew interesting perspectives from those working in different areas of the sector. We talked about the pricing outlook for steel and its principal components, and the view of market participants that there may be downward pressure on the input prices throughout the rest of 2017.  This is in the light of recent market rallies fuelled by strengthening demand for steel, and the Chinese government’s temporary cap on the production of coking coal, which severely restricted supply last year, but is unlikely to be repeated in the near future. 


The day concluded with a presentation by Dr Nils Naujok, our sector lead in Germany. He talked about what it takes to be ‘fit for growth’ in the metals sector, in the face of sluggish global growth, political uncertainty, regulatory pressures, digital disruption, and changing customer expectations. As he explained, ‘fit’ companies have three things in common: they have 
a clear strategy built on world-class capabilities; they find smart ways to manage their resources, and make sure they have the right assets in the right place; and they have an organisational structure which is flexible, nimble, and gets the best out of their talent.  According to his analysis only about 6% of companies are ticking all these boxes; the rest are managing one or two, but struggling in other areas. Some companies, for example, have a great strategy but lack the capabilities to deliver it; others lack a clear strategic direction, or have a cumbersome organisation unable to respond quickly enough to change.

What I found most interesting about the presentation was Nils’ discussion of the three different types of capabilities companies can develop and exploit to become part of the ‘fit club’. There are
 innovators who focus on understanding customers’ needs, and meeting those needs in genuinely innovative ways, whether through product or process. Then there are supply chain specialists, with ultra-efficient operations making the most of economies of scale to optimise their margins. And finally there are cost experts, who are streamlining their operations by rethinking what they do, and where and how they do it, including using outsourcing. 

And if there was one takeaway then from my perspective it was this: companies in the sector haven’t traditionally had a culture of creativity and lateral thinking, but if anything, that’s even more important, in a digital age. Like the LME, the industry has the chance to achieve the best of both worlds: new technology has a huge amount to offer, but it’s the human factor that will allow the sector to survive and thrive in the new business landscape. That means bigger ideas, bolder strategies, and braver leaders.

Overall, it was a great experience and we are very appreciative to the London Metals Exchange for hosting us on the day. 

Jackie Chow |  Director, Valuations
Profile | Email |  +44 (0)20 7213 5829

 

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