Top bank stakeholders of the London Metal Exchange are likely to amass enough support to block a sale they fear would bring a more heavily regulated owner and hurt their lucrative warehousing businesses, senior industry sources say. The LME said in September that at least 10 parties had expressed interest in buying it, and analysts estimate it could be worth as much as $1 billion.
As a member-owned organisation, the exchange requires approval from members holding 75 percent of outstanding ordinary or "A" shares for any sale. Potential buyers are likely to include CME Group Inc, IntercontinentalExchange and SGX Singapore Exchange. The first two in particular have stricter US regulators, which could threaten members' businesses. Big banks such as J.P. Morgan and Goldman Sachs have invested heavily in physical metals business since the economic downturn began by buying warehouses and beefing up their trading teams and financing operations.
Shunting metal around has been a money spinner for them as slowing global growth pulls down commodity prices and leads to stockpiles of surplus material. For the banks, simply storing all the metal can generate tens of millions of dollars in rental revenues. LME rules allow warehouses to release only a fraction of their inventories per day, much less than the metal that is regularly taken in for storage. This creates long queues to get metal out and guarantees rental income.
Knowledge of trade flows - which regions are buying or selling - and the option to play price differentials between physical and paper markets provide these banks with an added avenue of profit. Also, LME rules allow large companies to build up big positions in the futures market, which can impact metals prices. Stricter regulation could curb this. So the banks could have an interest in scuppering a sale of the 130-year-old exchange, one of the last bastions of open outcry trade.
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