London, 13 October 2009 

My Lords, Ladies and Gentlemen: I closed my speech at this dinner last year with the wish that we would indeed all be meeting again in a year’s time. There was considerable doubt at that time about the future, not only the future of banking and financial systems, but of the broader economy. World trade had collapsed and credit was virtually non-existent. It seemed to many that the future would be defined by contraction. 

It is therefore a great pleasure to welcome you to yet another sold-out LME dinner, with the room filled to capacity and, I believe, just as many overseas guests as we would normally expect to see. 

That is not to say the World has recovered. It is clear that there has been a great deal of pain, and that there will be more to come. But the Exchange, it members and the industry we serve have survived the onslaught of recession, the fear of depression and the confusion of broader market signals.

There are several reasons why that is the case. I will leave a discussion about the less-obvious reasons to our eminently better qualified guest speaker, but at the risk of disappointing those in the room who bet short I think it is worth noting what we believe to be the key reasons.

The metals industry is based on the production, consumption and trading of hard assets. At a time when intangible financial products have been largely discredited as vehicles for investment or as collateral for credit it is no surprise to find that, to put it simplistically, real stuff is favoured by those who want and need to invest.

Meanwhile the global strategy of stimulating recovery by investment in infrastructure has sustained, perhaps even increased, demand for basic commodities such as the metals we trade. The need to hedge the risk associated with that demand is even greater now, in an economy still suffering a hangover brought on in part by a liberal attitude to risk.

The LME has sustained pre-crisis turnovers during 2009 because it has proven to be a safe haven for business. The advantages of independent valuation, counterparty-risk mitigation through clearing and the provision of efficient trading venues have kept the LME at the centre of the forward metals markets trading business.

The fact that the LME’s approved warehouses are holding more than five and a half million tonnes of metal in stock is only one more piece of evidence of the ability of a well-regulated market to channel capital where it is needed and to reduce transaction risks to acceptable levels.

The successful introduction of LMESmart, coupled with the construction of two new data centres and the building of a new IT infrastructure has given us a much more resilient and flexible trading and post trade administration system that keeps us fit for purpose in the foreseeable future.  We are now in the final stages of preparing for the release of LMESword, which completes the strategy of having the LME take ownership, and therefore control, of its key systems.

We are now more stable than ever before in terms of systems, and we own the key constituents of our exchange product. That situation makes us more confident about the advantages we might offer to other market sectors.

We are not operating in an aggressively acquisitive fashion and we believe that co-operation is much more effective than coercion. But we do also believe that the LME has the regulatory and systems advantages that can ensure the growth of London as the key trading and clearing hub for commodity and related markets. Our blend of OTC and on-exchange trading makes us unique and we will continue to look for opportunities to share those advantages with other sectors.  

Meanwhile the need to invest will not go away, and I am pleased to report the LME has managed to maintain an aggressive investment policy married to the introduction of a dividend policy while at the same time holding to its pledge to keep fees unchanged, at bargain levels, for a three year period.

One of our more obvious investments has been the creation of the disaster recovery trading floor at a location in Essex. We recently tested that facility with a full day of trading, which was sufficiently successful for us to prepare for regular, if not frequent, trading days at the site.

This of course brings me to a perennial subject in this speech; so predictable that if I omit to mention it rumours will begin and panic will set in to parts of the Grosvenor House tonight. So, for the record; there is obviously no plan to close the Ring. And, incidentally, the LME is still not for sale.

The LME relies heavily on its Committees for advice and information about the broader business environment. The committees are an important sounding board for new ideas and we make good use of their collective skills. It is important that we have the right participants in those committees and I would like to thank all committee members for another year of hard work. In addition, I am pleased to announce the LME tonight acknowledges the contribution of three individuals, all ex-Board members, who have continued to contribute on a voluntary basis to the smooth running of our committees over a long period of time despite having had the opportunity to retreat from active service. Phillip Crowson, Ken Davies and Miles Linington have been awarded Honorary Membership of the LME. We look forward to working with them in the future.

We continue to work closely with our clearing house, LCH-Clearnet. We have both suffered systems delays in the past 12 months, but those delays have been caused by the overriding need to get things right rather than to get them quickly.

One consequence of those delays was the postponement of the launch of our Cobalt and Molybdenum contracts, which was always a launch contingent on systems deliveries. We now have a firm launch date of February 22nd next year and we have already announced our first Cobalt brand listing, being Vale Inco. We held a minor metals breakfast in the City this morning and had the pleasure of hosting more than 100 guests with an interest in the contract launches.

That brings me to steel, and to product development in general. Somebody once said that 90% of the secret of success is ‘being there’. As far as steel is concerned, we are very much ‘there’. Our warehouses are being used, with stocks moving in and out and we have recently approved additional delivery points in Rotterdam and Antwerp. There is strong and growing demand for our steel data (which is not free). Trading volumes have trended higher and the fact that much of that trading is related to stock financing is exactly as we predicted. All new contracts begin life as an extension of physical trade before assuming the pricing role that leads to hedge business.

It is also a fact that in the LME’s experience the success of new contracts is event-driven; the aluminium contract was brought to life by the collapse of the Soviet system, the zinc contract became important with the demise of the producer pricing system and the nickel contract grew after prolonged strike action destroyed the producer pricing basis of that commodity.

Events are not predictable, but what is certain is that when an event does come to the steel industry, we will be there.

There is another factor at play. I am not the only grey-hair in the room who remembers the days when LME members, by convention not by rule, guaranteed to make each other small volume markets. That convention provided a certain level of safety in market-making. It is not surprising that the advent of greater transparency and broader access to market, coupled with the understandable need to reduce risk, has seen that practice long since die away. In the long term that does not matter, but in the short term it does mean that initial liquidity is somewhat harder to generate and the age-old market question ‘what came first, the liquidity or the liquidity?’ is even harder to answer. Fortunately, we can be patient and we will continue to market our products.

Many of you attended the LME Seminar yesterday morning and even those who did not will not be surprised to hear that the significance of Asia, and of course China in particular, dominated the presentations about the global economy. The region has been important to the LME for many years and we have enormous business there, both as an exchange and as a member community. Our presence in the region through the approved warehouse network, data sales and our (profitable) education programme continues to grow. It is therefore a natural step for the LME to establish an office in the region in order better to represent the interests of the business in what is likely to be the critical centre of growth for years to come. We anticipate opening an office in Singapore during 2010.

I cannot leave this podium without talking about tin. There has been an enormous amount of speculation in the press about tin. The market itself has been somewhat less exciting. We have a requirement to run orderly markets, and we have rules that ensure that markets operate properly. Our rules, like all good laws, provide for predictable outcomes and there have been no surprise outcomes in the tin market. Markets exist only because there is a lack of certainty about price and the fact that there is always somebody somewhere who does not like a given price does not make the price wrong. The rules are not broken, the process is predictable and the market is orderly.

This has been a tough year for most companies. But it has been a better year than many anticipated. And the robust nature of the industries that combine to make the business strong is evident in the range of guests here tonight.

I would like the members of the London Metal Exchange to rise and join me in a toast to the health and future prosperity of our guests.

Ends --

Martin Abbott, Chief Executive Officer.