Tensions are mounting between HKEx-owned London Metal Exchange and furious aluminium producers over its warehouse delivery system
If you judge the success of an exchange by its trading volumes, the London Metal Exchange has been doing just fine in this, its 136th year.
Volumes were up 8 per cent in the first nine months, extending a period of boom that has been running uninterrupted since the fateful year of 2009.
If, however, you judge an exchange by its relationship with its users, the LME is in a lot of trouble. Which means that Hong Kong Exchanges and Clearing, which paid so richly for the LME's global metals franchise just a year ago, is in trouble, too.
Rarely in the LME's long, colourful history has it come under such sustained attack by those it is supposed to serve. The focal point for the multiple barbs being aimed at the exchange is its warehouse delivery system.
Consumers are furious with the way things are.
"We believe that the current system is dysfunctional and prone to manipulation," was the stark message from the Aluminum Users Group, representing the North American beverage can industry.
"The current system does not work … the LME's current practices must be changed."
The call to arms by Tim Weiner, a global risk manager at MillerCoors, has sent regulatory and legal waves crashing out of the United States Senate hearing room where he was giving testimony.
Producers are furious about the LME's proposed solution.
US aluminium giant Alcoa has publicly warned HKEx "not to act carelessly", lest it send a message to users that "the LME may not be the correct forum for their price discovery process".
Others have just given up.
The North American Die Casting Association has recommended its members shift their pricing on all new contracts away from the LME's North American alloy contract. They feel the contract's price has just stopped being relevant to their business.
HKEx has, it seems, bought the venerable LME just at the moment it is going through one of its periodic crises of confidence.
The LME's physical delivery system is certainly the catalyst for the current storm.
But is it the cause or merely the flashpoint where long-building tensions, both in the aluminium market and the exchange, are now bursting to the surface?
If the LME warehousing system is malfunctioning, it is at least in part because the aluminium market is malfunctioning.
Supply chains are cracking, the disconnect between LME and physical prices has become a gaping chasm and the relationship between primary and secondary markets is largely broken.
The root problem is that aluminium is a market that does not obey the law of commodity supply and demand. The law states that when demand contracts, the price should fall to the point that supply adjusts.
In practice, that is not what happens in this market, as Alcoa itself admitted in its open letter to the LME. When demand collapsed in the financial crisis of 2008-09, the supply response was far too little, far too late.
The result is millions of tonnes of surplus metal gathering dust in warehouses around the world.
How much? Actually, nobody really knows because another problem with this market is the lack of statistical clarity.
The collective best guess is something like 10 million tonnes.
It is the ebb and flow of this surplus, from LME to non-LME storage, between LME warehouses in the same location and between LME locations, that has clogged up the exchange's physical delivery system.
Producers are still failing to cut output sufficiently to tackle this legacy mountain. Consumers have failed to manage the pricing consequences.
It is somehow typical of aluminium that the two sides have offered up diametrically opposed views of what the LME's problem is.
But on one thing at least they are agreed. Industrial players, whose pricing is the LME's lifeblood, are being marginalised by financial players. Or to quote Alcoa, "the real issue is that the LME price no longer represents the fundamentals of the industry due to increased speculative trading".
"Speculative trading" has been the main driver of the LME's splendid growth story to the point, as Alcoa pointed out, that turnover in the LME aluminium contract is now 37 times the size of the physical market, up from 29 times in 2010.
It is the cocktail of too much money and too much metal that has hobbled a physical delivery system that was never designed to handle either, let alone the combination.
So what can the LME do? Or, rather, what can HKEx do? After all, it is HKEx's LME now.
How can the LME's new owners reconcile the needs of the metal men, who guarantee the validity of the exchange's prices, with the needs of the money men, who have fed the exchange's recent volume growth?
The solution will have to be multi-dimensional because this is not a one-dimensional problem.