Wolff Sees Promise: An Interview With the Chairman of the LME

The new chairman of the London Metal Exchange, John Wolff, discusses how changing politics, depressed world economics, and new commodity contracts are affecting the exchange. 

Si Wakesberg is a New York City-based consultant to the Institute of Scrap Recycling Industries (Washington, D.C.).

The economic recession may be pinching the international commodities market, but from all impressions, John Wolff, the new chairman of the London Metal Exchange (LME) and a director of Rudolf Wolff & Co. Ltd. (both based in London), hasn't let it hurt his outlook. While admitting that the recession in Europe--particularly the continent, but also the United Kingdom--and the United States has affected LME trading, he points out that "we've had three very buoyant years for all nonferrous metals. ... We're now encountering a correction on aluminum and zinc, a bit on nickel, and, to a lesser extent, on copper."

Did the war in the Gulf add to these troubles? Besides some threat to aluminum production in the Gulf region, he says, the war had no direct effect on LME trading. Indirectly, however, Wolff notes, the Gulf war "anesthetized" industry, causing many to either cancel or postpone major decisions. It's unknown how Iraqi withdrawal from Kuwait will affect the markets.

The final effects on the LME of the last year's radical changes in the Soviet Union and Eastern Europe are also uncertain. There is great potential for long-term use of the exchange by Eastern Europeans, Wolff believes, but it will take time to make the adjustments necessary to make the arrangements work. "The existing artificial prices in some areas have to be, straightened out," he says, "and we will have to wait until the proper liquidity can be achieved."

The other Eastern Europe issue facing the LME revolves around movement of Soviet nickel, a main supply source for the exchange. There is a possibility that the United States and the Soviet Union will trade directly in the metal--thus bypassing the LME--but, Wolff says, for the foreseeable future Soviet nickel will continue to move via the LME route.

The charismatic LME chairman seems to find the positive side of every potential negative. For instance, when asked about the loss of several ring-dealing members last year, Wolff notes that this is behind the exchange, which gained a new member earlier this year. And even last year, at the annual LME dinner in October, he pointed out that the collective net worth of the remaining ring-dealing members was far greater than it was in 1980. In fact, he said at the dinner, LME warehouses were then holding more than $1 billion of stocks. Today, he notes, "while our membership has been reduced, the LME is in fewer but stronger hands and we are not concerned.”

The opening of the LME warehouse in Baltimore--which is already storing aluminum, tin, and zinc--was only the first of a series of such warehouse openings planned for the United States, Wolff says. "By the end of 1991, " he notes, "there should be a range of LME warehouses in the Midwest and West, though probably not in the locations originally indicated."

The exchange may increase its warehouse presence in Japan, as well. The six warehouses in that country now store only aluminum, but, according to Wolff, there is a possibility that they may soon begin storing other metals. The LME also has a warehouse in Singapore and 17 locations throughout Europe.

In general, the LME chairman says, the exchange's inventories are on the rise. And though some have questioned the accuracy of LME inventory figures as published, he declares that "the stock figures we issue are accurate. They are represented by warrants that are issued twice a week."

On the question of copper warehousing, however, he seems more tentative, conceding that the LME might be skating on thin ice in its relations with the Commodity Exchange Inc. (COMEX) (New York City). "The U.S. copper industry is asking our intention," he notes. "I can tell you that copper warehousing in the United States is under investigation, but that it requires additional study." Wolff admits to some LME competitiveness with COMEX, but calls the two exchanges "complementary" since they create arbitrage business for each other.

What's happening with the secondary aluminum contract many believed would be introduced this year? Why are the Japanese so opposed to it? According to Wolff, a study of the contract is continuing and consultations were to be held with the Japanese in April. The Japanese have been concerned about the contract's specifications, he says, but it's hoped that recent discussions about their concerns would erase some misunderstandings. "The contract has a 50-50 chance of being approved," he believes, noting that the LME has conferred with U.S. secondary aluminum smelters on contract specifications.

A tin options contract is planned for introduction on the LME this year, according to Wolff. Tin trading in general, he says, "is a small contract, with a turnover of approximately 160,000 tons per year. ... It's not going to be a large market, but it's still important to us."

Discussing the demise of producer prices over the years and welcoming producer participation on the LME, Wolff says he doubts producer prices will make a comeback. "Volatility in metal trading today," he notes, "is beyond any individual producer's control."

Looking ahead to the second half of 1991, the LME chairman foresees a continuation of the economic downturn though he believes there may be recognizable signs of a pickup sometime in 1991. If the recession deepens, it would affect LME trading, but, Wolff anticipates, the world metal market will slowly pull itself back up again. World stocks, particularly copper, he emphasizes, are still relatively low. "If wouldn't take very much to turn these markets around," he says.•