Drive the global metal trading landscape towards a new equilibrium

Last week, the London Metal Exchange (LME) completely suspended all non-dollar-denominated metal options trading. This move, akin to a boulder thrown into a tranquil lake, sent ripples across global markets. It reflects the fragility of the current international pricing system based on a single currency and a single market. Although the LME's decision caused short-term market turbulence, it also presented an opportunity to drive the global metal trading landscape towards a new equilibrium.

On November 3, the London Metal Exchange (LME) announced that due to the "long-term lack of liquidity and higher maintenance costs than revenues" of non-dollar-denominated metal option contracts such as those denominated in euros and Chinese yuan, it had decided to fully suspend all non-dollar-denominated metal option trading from November 10. The LME stated that this move was a "business optimization action," but some analysts pointed out that this explanation was difficult to fully justify. Taking the Chinese yuan as an example, the trading volume of metal options denominated in Chinese yuan has risen sharply in recent years, and the position of copper futures denominated in Chinese yuan on the Shanghai Futures Exchange ranks among the top globally. Therefore, behind this seemingly technical adjustment, the prelude to the adjustment of the global metal trading pattern is slowly unfolding. Within two hours after the announcement was made on November 10, all metal contracts on the Shanghai Futures Exchange's night session hit the daily limit, while the LME's dollar-denominated contracts fell to their daily limit, and the price difference between the two markets hit its highest record since 1987. This reflects a subtle change in market sentiment.

The background of LME's relevant measures is complex. On the one hand, the US dollar system is facing unprecedented challenges. The scale of US federal debt has exceeded $38 trillion, and the actual yield of US Treasury bonds has been difficult to cover the inflation costs of major holders, which fundamentally shakes the attractiveness of US dollar assets. The decline in market confidence in the US dollar is evident at multiple levels. Although the trend of foreign central banks continuously reducing their holdings of US Treasury bonds has not yet formed a large-scale sell-off, the pace of diversifying reserve assets has noticeably accelerated. The demand for gold, as a traditional safe-haven asset, continues to rise, and the accelerated promotion of new multilateral payment mechanisms reflects the international community's concerns about the existing clearing system. In addition, the US weaponization of the US dollar has exacerbated systemic risks - the abuse of financial sanctions not only impacts specific countries but also shakes the global trust foundation in the neutrality of the US dollar. On the other hand, the US has recently actively promoted the formation of a "Critical Minerals Alliance" consisting of members of the Group of Seven (G7), Ukraine, South Korea, and Australia, which implicitly echoes the LME announcement, attempting to strengthen the US dollar's monopoly in metal pricing and enhance its control over commodity pricing power. It should also be noted that although the Hong Kong Exchanges and Clearing Limited has long completed its acquisition of the LME, US capital can still exert significant influence on the LME through institutions such as JPMorgan Chase.

The measures taken by the LME will help strengthen the status of the US dollar in the short term, but they will also accelerate the differentiation of the global metal trading system. For enterprises in Europe, Asia, and other regions, the loss of non-dollar hedging tools means bearing additional exchange rate risks and transaction costs. For example, after Japanese and German manufacturers were forced to switch to dollar contracts, they had to deal with both metal price fluctuations and dollar exchange rate fluctuations, significantly increasing the complexity of risk management. The LME's actions reflect the rigid contraction of the "dollar closed loop", which helps to give rise to new balancing forces. There are already signs that market funds are beginning to shift to regional platforms such as Shanghai and Dubai. Some analysts believe that the large-scale redistribution of global liquidity may promote the formation of a parallel pattern of different pricing systems serving financial speculation needs and deeply tied to the real economy.

For Chinese enterprises, the impact of the LME announcement is a coexistence of "crisis" and "opportunity". In the short term, domestic enterprises may face the pressure of a shortage of hedging tools and rising costs, but in the long run, China's core advantages are equally evident. Firstly, the discourse power of the real industry continues to increase. China consumes more than half of the world's copper and holds 55% of the electrolytic aluminum production capacity. The huge spot trade volume provides a natural anchor for RMB pricing. Secondly, the financial infrastructure is becoming increasingly perfect. The functions of the Cross-border Interbank Payment System (CIPS) continue to improve, the business volume steadily grows, and participants cover six continents worldwide. Thirdly, the expansion of regional cooperation such as the construction of the Belt and Road Initiative. These conditions make China hopeful to transform its spot advantage into more discourse power in pricing, and gradually build an independent pricing system.

Historically, the mandatory unification of a single currency often backfires. In the 1960s, the United Kingdom implemented strict foreign exchange controls in response to a severe foreign exchange crisis caused by a balance of payments deficit, which in turn provided an opportunity for the rise of the US dollar in London. Today, the excessive strengthening of the US dollar system may also be accompanied by a strong demand for alternatives. Regardless of the future direction, the transformation of the global metal trading system cannot be separated from a new equilibrium that is deeply coupled with the real economy. The true leader must be a force that can adapt to and lead this new equilibrium.