Newedge, a leading multi-asset brokerage and clearing house owned jointly by Société Générale and Crédit Agricole CIB, recently announced a slew of new hires and promotions at their metals desk. The move came after a period in which the company saw several members of its metals group move over to other firms. Newedge, a category 1 ring dealing member of the London Metal Exchange, is currently the single largest LME participant by market share, according to Michael Turek, senior director of the Metals Group at Newedge USA. Turek sat down with JLN Metals editor Sarah Rudolph in his New York office for a chat about Newedge’s metals business, the HKEx takeover of LME, the outlook for China, and the current low interest-rate environment, among other things.
Q: What is unique or special about Newedge’s metals group?
A: We have a customer-centric model that is somewhat unique. It is based on a non-proprietary model. We don’t compete with our customers positionally; we’re there to facilitate trades. We don’t have any proprietary trading of either client assets or our own.
We are very overcapitalized in the client positions we hold, on purpose. We maintain what I called purity of balance sheet in that unlike most of our competitors, we don’t have any Level 3 risky assets on our balance sheet, no concealed or non-reportable derivatives positions. It’s all nearby, very fungible secure assets. And we’re not trading with those assets.
Metals is Newedge’s fastest growing business.
Q: What impact do you believe the Hong Kong Exchanges & Clearing takeover of the London Metal Exchange will have on LME’s markets?
A: We’re excited about the new ownership of the LME, particularly given HKEx’s commitment not to change the format in terms of maintaining floor trading and daily and monthly prompts. My sense is the exchange will be driven as we are by client needs. So it will probably be a fairly stable exchange. It is natural for businesses to be attracted to areas where capital is generated, and that is the Far East. We supported that merger. We were already established in the Far East through our joint venture with CITIC, which permits qualified corporate participants access to Chinese markets through the Newedge platform and facilitates arbitrage opportunities.
So for us, this is additional synergy. Assuming the Chinese central authorities will become a little bit more relaxed about currency transferability, we hope that this alliance might culminate with a Chinese currency denominated contract or two.
What isn’t being spoken about much, but what I feel would be an important component of this marriage is a chain of LME registered warehouses across the Chinese mainland, which would help serve China’s needs as the largest producer and consumer of metals. That warehouse chain will be very significant in building the business and in building Western-Sino trade relationships.
Q: LME’s warehouses are currently in a wide variety of places, yes?
A: Yes, there is an extensive chain here in the states, they are in Europe, in Asia they are predominantly in South Korea, but there is currently no LME-registered warehouse complex on mainland China. I think that will be very important in building international commerce.
Q: There have been problems with the high cost of storing physical aluminum at the LME affecting futures and options trading, and there was a move to have a warehouse change to help with the problem of queues. Does that affect you or your clients?
A: First, I want to make it clear that we don’t actually trade the physical commodity because we do not compete with our customers. That said, it’s not so much a problem of the cost of warehousing. In this low interest rate scenario, it has become increasingly attractive to banks and other institutions to finance surplus inventories of metals. In parallel to that, yes, the LME has a rather restrictive outtake policy. You’d have to ask the LME, but I suspect it is tied to how much metal you can actually move on a daily basis. Those queues have lengthened over time and, as a consequence, physical premiums have risen. This has caused some disquiet among consumers. I don’t wish to speak on behalf of the consumers or the exchange, but I’m aware they are in ongoing dialogue about alleviating this condition. But it’s more a function of the low interest rates than with the cost of warehousing.
Q: I was just about to ask you about the low interest rate environment. Are there other issues arising from the current period of low interest rates?
A: Well, there are some more recent developments. In the short term, there is what appears to be almost a globally-coordinated easing. The Chinese announced easing, the Japanese announced easing yesterday, the Fed came in with its QE3, the Europeans seem to be buying bonds. So when you look at that environment, a month ago in the metals complex we were facing an oversold market in which prices had become pretty depressed, largely as a consequence of less than stellar demand and concerns about Europe. Since then we’ve had some significant rallies, though today we skimmed a bit of froth off the top and consolidated a little. My sense is that the unemployment levels in the States continue to disappoint. But still we’ve had some healthy price increases in the last few weeks, I believe as a consequence of this global easing. Whether we can sustain those gains will be a function of how successful this program is. Obviously other easing programs have been less successful, which is why we required these bolster programs.
My suspicion at the moment is that the markets will not come off too far, because the sense is that the correct action has been taken. The easing should help the business environment, at least for industrial metals.
Q: People have been talking about China, which was having terrific growth, being on “shakier ground” now economically. Do you see that as temporary or as a long-term trend? Could it be disadvantageous to the HKEx-LME merger?
A: The economic data coming from China is certainly more opaque than we are used to in the West. The picture is not as clear in China as in Europe or the Americas, but one senses generally that you are right, there has been a slowdown in activity there. The situation is different in that you have a central authority which can adjust the situation somewhat differently than we would go about doing it. The contacts I have on the mainland are anticipating more easing, which they hope will return them to a healthy rate of growth. The local perception may be different than our perception in the West, given that they are also very self conscious about inflation, particularly with basics like food inflation. They have been rather successful thus far in managing wage gaps between urban and rural societies and have therefore mitigated to a large extent social friction between the two. I think one of their prime drivers is to maintain that peaceful approach to social economics. Obviously, their ways of doing it are more concentrated than we are able to. Late last week, China announced a large capital infrastructure expansion program. I have a feeling we will see more of that – bridges, roads, trains. That should drive the economy at a healthy rate. But we also have to manage expectations. Everybody thinks China should be growing at 8 percent – which is robust – and if it doesn’t grow at 8 percent everyone gets upset about it. Well, we may have to adjust to a more moderate rate of growth than that, but still a healthy rate of growth by Western standards.
Q: You mentioned possible currency transferability leading to potentially a Chinese currency denominated contract. Are you optimistic that may happen some time soon?
A: I don’t have any concrete information – as I just said, the Chinese are rather opaque about their intentions! But, not speaking on behalf of the Chinese government of course, my sense is that in terms of trade and liquidity and relations, I think it would be a very positive move. Thus far, they’ve been reluctant to do so — again it’s a protective measure to insure that their ability to manage their economy in a centralized fashion remains intact. I think in the long term they will see the attractions of a more global approach to business and that will be very positive for them and for us.
Q: You mentioned that Newedge has had several new hires recently, which is certainly good news. There seems to have been a lot of movement of staff among financial services firms of late, including some people moving from Newedge to other firms.
A: Yes, that’s the financial services industry. People do come and go. That is typical. We believe we have a solid franchise. Both our volume levels and client deposit levels have risen quite sharply in the last few months. It’s a very welcome vote of confidence from our customers. I think our team building exercise is a very pointed statement of our commitment to our clients, the markets and the industry as a whole. It is certainly a major development for us and we hope it will be an exciting development externally, too.
As I said, metals continues to be Newedge’s fastest growing area.
Q: The CME recently started trading new scrap steel futures and hot-rolled coil steel options. Is there competition between the CME and the LME in that business?
A: I can’t speak for the LME. Steel is a very interesting and potentially very significant business, and obviously we want whatever products and whatever exchanges our customers want. My sense is that steel is still struggling a bit to find a common denominator that will get enough people to do two things with steel: one is trade, and two is, set their physical prices on, because once you set your physical prices on, you create more people who need to trade because they need to hedge. Steel is more complicated than other metals we trade in having so many classes and types and species. We do confer regularly with both the LME and the U.S. exchanges on steel and steel byproducts and scrap. I have been involved with some of those discussions. We think the CME Group contract has potential. It probably didn’t get off to the start we really wanted, because I think we’re still feeling around for a common denominator that a large segment of the industry can actually trade that correlates with the pricing of the physical material.
Q: You mentioned that your clients are from many segments of the industry. Have you seen any changes recently as far as market participation from different clients?
A: Within the industrial clients, you’ve seen some consolidations, just because some large corporations have bought other large corporations. I would say that the trend in the last five years has been for financial participation to increase and industrial corporate participation to decrease.