Lehman Hits Commodities

Financial firms sink, but so too do commodity prices...?

THE IMPACT OF two giant US financial institutions collapsing on Wall Street has not spared the commodity markets, reports Commodity Online. In fact, the demise of Lehman Brothers has hit the commodities sector hard.

   Lehman Brothers Holdings Inc., the fourth-largest US investment bank, filed for bankruptcy on Monday and the cascading effect of that left global markets bleeding across several continents.

   Following the bankruptcy application, Lehman Brothers was suspended from energy and commodities trading in London. The London Metals Exchange trades copper, aluminum, zinc, nickel, tin, lead, steel and plastics.

   The bank used to invest heavily on commodities and as its funds dried up in the commodities markets, the tremors were felt across India, China and European trading.

   The London Metal Exchange, the world's largest copper bourse, together with the Liffe commodities exchange and Intercontinental Exchange Inc's ICE Futures Europe – part of the second biggest energy market – all suspended Lehman from their exchanges. LCH Clearnet Group Ltd, which clears the trades made by financial institutions, declared Lehman's European subsidiary to be a defaulter.

   Lehman was forced to file for bankruptcy after two suitors, Barclays Plc and Bank of America Corp, abandoned takeover talks. Now the credit crunch in the US has also hit the commodities sector.

   The firm's value-at-risk to commodities, a measure of how much the bank estimates it could lose, averaged $15 million a day in the quarter ended August 31, compared with $12 million in the previous quarter.

   Lehman was a category 2 member of the LME, making it eligible to issue and clear contracts. It couldn't trade on the floor of the exchange, but its staff – or rather, those still trying to wind down the business or keep manning the phones while a buyer is found for its different assets – are now suspended from trading on the bourse's electronic platform.

   The firm can still trade by phone, directly with other counterparties, but each trade has to be approved by PricewaterhouseCoopers LLP, which is handling the liquidation of the business.

   Lehman has suspended almost all other market activity, too. The company will sell its portfolio of greenhouse-gas credits as early as next week. Intercontinental Exchange suspended Lehman’s access to its ICE Futures Europe trading facilities. The exchange trades Brent crude oil, gasoil and other energy futures. Lehman also traded emissions on ICE. Liffe has commodities trading in coffee, sugar, cocoa in London, and wheat and rapeseed in Paris.

   The London Bullion Market Association (LBMA) – which represents the wholesale Gold and silver market in London – doesn’t expect any effect from the bankruptcy of Lehman. The LBMA has 57 ordinary members, of which Lehmans was one, up from 55 last year and 52 in 2006.

   BullionVault is the only dedicated private investment service to be a full member of the LBMA.