Curbing speculation is foolish, warns LME
June 26, 2008
By Dale Crofts and Millie Munshi Chicago and New York
Governments would be foolish to limit participation in commodity markets and curb speculation because prices were based on supply and demand, the London Metal Exchange (LME) chief executive, Martin Abbott, said yesterday.
Rising demand from emerging markets and a lack of investment by suppliers had created a "structural change" in commodity markets, fuelling higher prices, Abbott said in New York. Increasing regulation to limit speculative interest would not lower prices and might hamper the market's role in price discovery, he said.
"There is in the commodity space as a whole something going on which cannot be ascribed to simply hot money coming through exchanges," said Abbott, who heads the world's largest marketplace for copper, aluminium and other base metals. "It would be very foolish of any government to stifle participation in markets."
Surging prices for commodities such as crude oil, maize and copper have prompted US senator Joseph Lieberman to suggest more regulation is needed to limit the role of speculators in the markets.
George Soros, billionaire US investor, has labelled the jump in energy prices a speculative bubble.
Abbott said: "Why would an elected politician have a better idea of what the price is than the summation of the entire world's oil industry trading across an open exchange? We didn't invest in plants, we didn't invest in deposits, and there's no wonder that the markets have caught up. What's going on here is a structural change."
The Reuters/Jefferies CRB index, which measures a basket of 19 commodities, has gained 18 percent since March 31 and is headed for its best quarterly performance since 1973. By Tuesday, oil had jumped 43 percent this year, while maize surged 64 percent in Chicago and soya beans rose 23 percent.
Concerns that investment funds boosted prices rather than supply and demand have prompted US regulators to investigate oil trading. On Wednesday last week, Lieberman issued a proposal that could ban institutional investors with more than $500 million (R4 billion) in assets from buying commodities.
Soros said told the US senate committee on commerce on June 3 that the increasing role of speculators had led to a "textbook illustration" of a bubble in the oil market.
Commodity producers have also expressed concern over the role speculators play in markets. In April, the LME launched its first steel futures contract, which has met with opposition from steel makers US Steel and ArcelorMittal.
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