A row over the London Metal Exchange's (LME) plans to raise revenues with a new fee could deter potential bidders for the exchange as any revision could dent projected extra revenue included in its valuation, industry sources said.

The rare public dispute between users of the exchange and the LME over the fee it announced in December has forced the exchange to go back to its board on February 23 to review the backlash. The LME, the biggest market for metals such as copper and aluminium, could make concessions.

Potential bidders are watching closely how the disagreement develops, a source with knowledge of the matter said.

Non-binding bids are due around the middle of this month in response to the exchange's announcement in September it had received more than 10 expressions of interest from potential suitors.

It will be a concern for most of the bidders if the price increase does not happen, the top industry source said.

Bidders were keenly interested in how the LME would implement the fee, despite the opposition from members, the source said.

We won't be remotely ready to put the fees in place by March 1, said the head of one brokerage. We're still working on the basis that we'll be able to head this thing off.

Well-placed sources told Reuters that the LME's new trading fee, scheduled to start on March 1, could account for up to two thirds of its total valuation. Some metal industry sources have estimated a bid could be worth a potential 1 billion pounds.

A second source with knowledge of the matter said the potential extra revenue that could flow from higher fees had been highlighted to possible suitors.

Those suitors include CME Group , the InterContinental Exchange and a consortium of the London Stock Exchange and the Singapore Stock Exchange , three sources said.

The LME declined to comment on the impact a revision of the fees could have on valuations.

The CME said it did not comment on speculation. An SGX spokesman declined to comment on whether the exchange had submitted a bid. An LSE spokeswoman said: We do not comment on market speculation.

A spokesman for ICE declined to comment late last month on a possible bid for the LME. ICE was not immediately available to comment on Thursday.

UK-based broker ICAP , the Hong Kong Stock Exchange, and Deutsche Boerse-owned Eurex are also potential suitors.

VOLUMES SOAR

The LME operates on a constrained-profit model, and has so far kept fees low for the trading houses and banks that own the exchange and use the market.

That is reflected in the LME's profits. Pre-tax profit in 2010, limited by the low fees, fell 28 percent to 12.5 million pounds, according to figures on the LME website.

But volume at the exchange jumped 22 percent last year to record of 146.6 million lots. The total value traded at the LME, which accounts for 80 percent of traded volume in global metal futures transactions, rose 32.8 percent to $15.4 trillion.

An LME trade known as tom-next, a spread between tomorrow and the cash date, accounted for up to 29 percent of LME futures turnover last year, depending on the contract.

A key feature of tom-next is that brokers normally absorb the client component fee, which can be as low as one penny. From March 1, the LME levy component of a tom-next spread trade rises to 50 pence per leg per lot.

The gross fee calculation is more complex than that. But either way, some of biggest clients have said they do not want to pay, metals market sources said.

The hedge funds and the big traders don't want to take the extra costs, said one head of metals trading on the LME. The big boys don't pay much anyway.

Clients are pushing back, said another head of metals trading.

Several metals industry sources said the opposition means the LME could make concessions on tom-next, possibly exempting it from the fee.

Members made a number of constructive proposals around the detailed timing of the fee increase and its implementation - including, for example, whether client tom/next trades should be charged at the new rate, the LME said in an emailed statement.

Suggestions from the meeting will be discussed at the board on February 23.

The LME has said it needs to increase fees to generate more revenue to update technology and systems and meet increasing regulatory requirements.

Some LME members who attended a meeting with LME Chief Executive Martin Abbott this week said the exchange had yet to spell out why it wanted the cash and how much it aimed to raise.

The LME needs to explain the rationale behind the fee increase, said the head of a company that trades on the exchange. In general people wanted to know why and they didn't understand the timing.

Another said the LME needed to be more transparent. They're keeping it (information) so close to them, he said.

(Additional reporting by Josephine Mason in New York; Editing by Veronica Brown and Anthony Barker)