Costs and investments cut LME profits

The London Metal Exchange suffered a 19 per cent drop in profits last year as higher costs and investments outweighed a sharp rise in trading volumes.

The results highlight the challenges facing the 135-year-old exchange should it remain independent in an increasingly competitive and more stringently regulated industry. They also underline the dilemma for the LME’s shareholders, the banks and brokers that use it, as they decide whether or not to sell the exchange.

The LME is the subject of a bidding war that is in its final stages, with Hong Kong Exchanges & Clearing, CME Group and the IntercontinentalExchange in the running to acquire the metals exchange, seen as one of the last great prizes in a wave of industry consolidation. The highest bids are expected to value it at about £1bn.

The exchange disclosed it would pay Moelis & Co, its financial adviser, a £3.5m fee plus 0.5-0.7 per cent of the valuation of the exchange if it is sold. It will pay a further £500,000 to “other advisers”, likely to include RLM Finsbury, the public relations firm. The LME has also retained Freshfields has a legal adviser.

According to figures disclosed in the LME’s annual report and seen by the Financial Times, revenues at the LME rose by a fifth last year. That was on the back of a 22 per cent increase in trading volumes in its contracts, which serve as global benchmarks for metals such as copper, aluminium and zinc, but net profit fell from £9.5m to £7.7m on the back of higher costs.

“The investment requirements of being a global exchange have changed the economics of the business,” Martin Abbott, chief executive, wrote in the report.

The fall in profits is unlikely to worry bidders, since LME’s profits are expected to rise significantly in the coming years as it brings clearing in-house and increases trading fees.

The moves have divided opinion in the traditionally clubby LME, leading to a rare public disagreement over the fee increase this year. Many shareholders remain wary of changes that a sale could bring and prefer the current model under which LME is run, not to maximise profits but for the benefit of its users.

“The LME is not for sale,” Mr Abbott wrote in the report. “But we cannot stop people from trying to buy it and it will be interesting to see whether bidders can show a good reason for shareholders to sell.”

He added: “The new fee will allow the exchange to maintain an appropriate investment programme, to maintain its regulatory capital requirements and to continue to grow in an increasingly competitive market.”

The results highlighted the weight of investment that the LME is planning in the coming years. It had signed contracts for £44m of expenditure at the end of last year, more than doubled from £21m a year earlier, on the back of investments in technology.

Mr Abbott pointed out that before interest, tax, depreciation, amortisation and the cost of the clearing project and the bid process, the LME registered record profits last year.

The board proposed paying no dividend, due to the uncertainty about the exchange’s future ownership.