Here is a little-known fact. The three-month contract, which has become
standard across the financial world from commodities trading through to
money markets, derivatives and other more exotic products, has its roots in
the Victorian shipping trade.
This convenient measure once represented the average amount of time it took
for freighters to ship copper from Chile to London, and may thus have
emanated from the London Metal Exchange, which was founded in 1877 by
traders who had previously conducted their business in nearby coffee shops.
They needed to ensure that, during the long voyage, the price of the metal did
not move to their disadvantage. The LME now provides a similar if rather
more sophisticated service to banks and other traders, offering futures and
options contracts for aluminium, copper, nickel, tin, zinc and lead. In 2005
the exchange branched out into plastics, a market that has yet to take off
properly.
This month it launches futures in steel, the world's second-largest raw
material market after oil and gas. The man in charge of the launch is Martin
Abbott, who arrived as the LME's chief executive in October 2006.
Mr Abbott is that unusual thing, a journalist made good. From a modest Leeds
background, he graduated with an indifferent law degree into the recession
of the early 1980s. He went to London and found work as a security guard, at
first in the City, next door to the LME's current location in Leadenhall
Street, by an odd coincidence, and then at a magazine publisher in Soho
Square.
“There were four of us. With my LLB, I was the least well-qualified,” he
remembers. He talked himself into a job selling classified advertising on
one of the magazines based there, Drapers Record, and then became a trainee
reporter. “The fashion industry was a great industry to report on, but the
money was terrible.”
He was offered another £1,500 a year to work for Metal Bulletin, another trade
magazine and the source of a range of esoteric but essential statistics for
the metals industry, despite having no idea what the publication did.
The LME was then at Plantation House, close to its current location and now
redeveloped as swish City offices. Then as now, the market relied heavily on
so-called “open outcry”, where dealers face off in a trading pit and conduct
frenzied bargaining. The practice has died out elsewhere, at the London
Stock Exchange, the oil market or Liffe, the London financial futures
exchange, but continues at the LME.
Early in his new career, Mr Abbott found himself looking out over the trading
pit. “It looked like a lot of fun, a lot of energy. Like most people, I had
no idea there was such a thing as international commodity trading.”
He was smitten. The fashion industry suddenly looked ... He grasps for the
word. Trivial? “The trivial parts were quite fun,” he laughs. Parochial?
Plainly. The LME styles itself the world's premier non-ferrous market, with
annual trading volume of more than 2,000 million tonnes with a turnover
value of $8,100 billion.
It reckons to have more than 90 per cent of the free world market in copper -
there is a significant market in copper in Shanghai, but this is not open to
outsiders - and more than 95 per cent of metals futures and options.
The coming of the steel contract could transform this market - and the LME's
historic name. The market in steel billet is about 500 to 550 billion tonnes
a year. “In theory steel could be as big as everything we currently trade,”
he says, “at which point I would have no problem whatsoever in finding a way
to get steel into the company's name.” He has no idea how, but “it's a nice
problem to be facing”.
The initial takeoff could be slow. Plastics never attracted the volumes that
had been hoped, and that contract is being rejigged. Aluminium, now the
biggest deal at the LME, was launched in 1978 and took ten years to build
volumes. Any big new futures contract always takes time to gain momentum and
to persuade users that they need it.
“I think you have to expect a slow start. It takes time to build credibility,”
Mr Abbott admits. “On the other hand, there's definitely a need in the steel
industry for risk management.” Steel prices, once fairly stable, are now
quite volatile. In part this is because of the huge demand from the building
boom that is accompanying the transformation of the Chinese economy, and
similar rapid development in the Middle East.
In addition, there is more movement across borders, and the emergence of new
centres of production such as Ukraine.
Mr Abbott gives an example of a potential customer. A vast construction
project is planned. The developer will have to source the materials
beforehand. The steel supplier, and about 40 per cent of world steel
production goes to the construction industry for use in reinforced concrete,
will be asked to provide a fixed price for a commodity whose cost could move
rapidly between signing and delivery months later. The LME contract allows
that supplier to hedge against this.
There will be the inevitable speculative trading in the new contract. At
present, it is impossible to say how much of the business conducted at the
LME by the banks and other traders who are its members is speculative and
how much is on behalf of industry.
Mr Abbott has himself traded on the commodities markets. After Metal Bulletin,
a job at publisher McGraw Hill and a spell at the LME itself as director of
marketing, he moved to one of the big firms in the market. This was Sogemin
Metals, where he was subsequently sent to run its small trading operation in
the US, in Connecticut, where he has spent the past decade and where his
wife and daughter still live, although they will relocate to London in the
summer.
In 2001 he went back into publishing, and back to Metal Bulletin, then in the
process of buying American Metal Market, its US counterpart. It must have
been odd, rejoining the business where he had started as a junior reporter.
And as publisher and editor-in-chief, surely the ultimate fantasy of any cub
reporter under the lash of a brutal news desk. It must have involved a cut
in salary, too, surely?
“I think they thought I had just been out for a very long lunch,” he jokes.
“In the latter half of the 1990s the commodities market was not particularly
exciting, especially in the US where everyone was dot-com mad. I did take a
salary cut to go back into publishing, but the job turned out to be
reasonably rewarding. There was a bonus structure around it - it wasn't a
hardship.”
The approach to rejoin the LME came through headhunters. The market is seen in
the City as somewhat remote from the rest, ploughing its own furrow in its
own odd way, and has not been caught up in the consolidation and merger
frenzy that has gripped other exchanges.
When he joined, “there was a sense that the LME was different,” he admits. It
helps that, though demutualised, the LME is still controlled by its 41
members, only 12 of whom have the right to trade on the floor. The simpler
contracts are traded electronically; the floor and the phone are used for
more sophisticated business.
Mr Abbott says that there is no pressure to scrap floor dealing, a move that
caused immense anguish when it was forced through, generally on cost
grounds, at other exchanges. “The floor will remain as long as there's a
body of corporate entities that find it a sensible place to be.”
From undistingished law student, through junior reporter, to metals trader,
the LME (once), publishing again, and then back to the LME - it is an
erratic career trajectory, I suggest. “There was no plan,” he admits. “You
couldn't plan that.”
Martin Abbott CV:
Born in Leeds in 1960.
1981: Graduates Leicester University.
1982 - 1984: Thomson Publications.
1984 - 1988: Metal Bulletin.
1988 - 1990: McGraw Hill.
1990 - 1993: Marketing director, LME.
1993 - 1997: Sogemin Metals.
1998 - 2000: Amalgamated Metal Trading.
2001 - 2006: Metal Bulletin.
2006 - present: Chief executive, London Metal Exchange.
Family: married with one daughter
A new billet
— Trading in steel futures has been tested at the LME since February 25 but
formally starts on April 28
— Each contract is for a specified parcel of 65 tonnes of steel billet and is
priced in dollars. At the current price of about $800 a tonne, this makes
the contract worth about $52,000
— Steel billet is different from flat steel, which is used in pressed steel
products such as car bodies, household appliances, etc, and is not being
traded on the LME. Billet is mainly sourced from scrap and is used mainly as
reinforcing bars in construction
— Billet prices have tripled since 2003 because of the worldwide construction
boom
