We are interested in having a warehouse in India: LME CEO

‘Fantastic that India is experimenting with commodities traded nowhere else’

India is an important market for the London Metal Exchange (LME), as Indian bourses are dependent on the global exchange for commodity prices. CEO Matthew Chamberlain, however, is interested in increasing LME’s presence in the country by establishing a warehouse as India and China are the only two major economies in the world without an LME warehouse. Excerpts from an interview:

LME has warehouses across the globe. But, you still do not have a presence in two major markets — India and China.

I think in India it is really about the logistics. Certainly, LME is interested and we need to make sure our Indian partners are interested as well. We don’t want to do it if it is not what the Indian market wants. Since it is about logistics, LME warehouses are generally in Free Trade Zones where they are set up with a particular tax treatment. We will have to look at how that would work but yes, we have warehouses all around the world; There is no reason why it couldn’t happen in India as well.

It is often said that commodity markets are more about speculation as there is hardly any physical delivery

Even on the LME, fewer than 1% of contracts go to delivery and that’s the case for most global commodities futures markets. I don’t think the right metric is what proportion of business goes to delivery. The right metric should be ‘Is delivery keeping the price in line?’ You only need marginal trades to go to delivery to make sure that your pricing is right.

So you don’t think that more trades should result in delivery?

Physical players, who are hedging their supply contracts, don’t want delivery because they have a physical supply contract. The exchange is only providing a financial hedging contract.

The client will close the financial hedging contract as he does not want the delivery through the exchange. The delivery has to be according to the commercial contract. S

So, ironically, even physical users do not want delivery because they are only hedging a physical delivery that is taking place on boats or whatever it might be. So I think it is the wrong metric to think about the proportion going to delivery. That is not, in my view, a good way to measure the success of the contract.

How do you see Indian exchanges experimenting with commodities like diamond and brass that are traded nowhere else? Can India be the price setter in such commodities?

It is a fantastic initiative. If there are commodities where India is the natural home, for example brass, then I think it is absolutely right to develop contracts that are the global pricing setters. That is a great example of where regional price makes total sense.

LME earns licensing fee from Indian exchanges that use your prices. But, what happens if the Indian regulator insists on delivery since that would lead to the end price being pooled from Indian prices?

Our licensing model is if people use our global price to settle contracts, then we do ask for licensing fees. Clearly, there is an alternative model whereby exchanges have their own deliverable contracts and create their own prices.

Then, obviously they wouldn’t pay licensing fees because it is not an LME price any more. Anybody is welcome to create their own physically separate contract but I would just note that because our global price is used by the physical industry, people generally like to settle contracts at the LME price.

But, if the regulator wants exchanges to move towards delivery, you might lose your edge.

That is a potential outcome. But I think it is also important to note that there are a number of models that could be considered. For example, could we have a physical settlement model that actually discovers the Indian premium like the incremental Indian price over the global LME price.

It would create a very strong Indian price but would still be linked to the LME global price that the physical market have in their contracts. So I don’t think it is as cut and dry like you either use the LME price or you have a physical price.

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