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LME Considering Settling Metals Contracts in Renminbi
Friday April 20, 2012 09:48
According to a report last week in the Financial Times, the London Metals Exchange or LME is currently considering allowing members to settle their contracts in Chinese renminbi.
In a survey of its members aimed at aiding the design of a new clearing house, the metals exchange reportedly asked if they would like to include the renminbi among its current roster of other currencies for the settling and clearing of trades, and if dropping the pound sterling would be problematic.
The LME, founded in 1877, is the largest exchange in the world for non-ferrous metals and its contracts have long served as a global benchmark for the metals industry. The FT article states that, “the LME’s benchmark contracts for delivery in three months were designed to mirror the length of time needed to reach British ports for shipments of copper from Chile and tin from Malaysia.”
Switching From Sterling
Since its founding, the LME’s important copper contract was denominated in sterling, until the “Black Wednesday” currency crisis in 1993, which made George Soros famous for shorting sterling. Since then, LME contracts for copper and later zinc and aluminum have been denominated in U.S. dollars, with settlement options in euro, sterling and yen.
Dropping sterling for the settlement of LME metals futures contracts would be, according to the FT, “a final blow to sterling’s role in metals trading.” The use of sterling in the settlement of contracts has been gradually decreasing, with one LME broker stating he hadn’t “traded a contract in sterling for five years.”
Why the Renminbi?
On April 16th, the People’s Bank of China allowed for one percent moves from a daily fixing, after having kept the limit at 0.5 percent since May of 2007. While this may not be significant in and of itself to the LME situation, the move will further internationalize the use of the renminbi.
The LME for its part is probably seeking to accommodate the Chinese companies currently operating on the exchange, with the Bank of China having formally applied to become the exchange’s first Chinese member earlier this month.
China also accounts for over 40 percent of global demand for most metals, potentially making it the LME’s biggest client. Nevertheless, according to the FT article, the renminbi “would need to become more freely tradable before it could be used for LME trading and settlement.”
Could this be the beginning of the renminbi as a reserve currency, and the end of the U.S. dollar’s domination globally? Time will tell.
***"In addition to running a busy medical practice, Dr. Jeffrey Lewis is the editor and publisher of Silver-Coin-Investor.com, where he provides practical information for precious metals investors".
***
By Dr. Jeff Lewis,
Editor, Silver-Coin-Investor.com
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