Metal exchanges are exactly what their name suggests: venues for the sale and purchase of base, precious and semi-precious metals. This can be for immediate delivery (known as spot delivery, two days later) or future delivery according to individual need.
There are only a few readily recognised such global venues. The London Metal Exchange calculates that it is by far the largest. COMEX, part of the CME Group, the Shanghai Metal Exchange and the Shanghai Futures Exchange are other well known players.
The London Metal Exchange unequivocally describes itself as the world centre for the trading of industrial metals – the majority of non-ferrous on-exchange business is conducted on our markets.
The LME says that in 2016 this equated to
- $10.3 trillion notional
- 3.5 billion tonnes
- 157 million lots
A member of HKEx Group, the LME brings together participants from the physical industry and the financial community to create a robust and regulated market where there is always a buyer and a seller.
There is always a price and where there is always the opportunity to transfer or take on risk – 24 hours a day. LME says investors value it as a vibrant futures exchange but also for its close links to industry.
The Exchange provides producers and consumers of metal with a physical market of last resort and, most importantly of all, with the ability to hedge against the risk of rising and falling world metal prices.
Meeting place for buyers and sellers
The LME is a meeting place of buyers and sellers of metal futures. It provides producers and consumers of metal around the world with the best way to manage their exposure to the risk created by metal price volatility.
Producers are at risk of prices falling, and consumers are at risk of prices rising. Hedging against these price movements using the LME’s futures and options contracts enables the metal industry to focus on their core business.
LME Ring, photo courtesy of LME
With hedging investors can
- Protect against price movements
- Lock in margins and offer long-term fixed prices to customers
- Improve budget forecasts
- Turn inventory into cash or security for finance
- Protect physical inventory against price falls
- Hedge physical purchases in times of production dfficulty.
Price formation venue
The LME says it is the de facto price formation venue for industrial metals. The prices ‘discovered’ on its platforms are used as the global reference and basis for physical trading and the valuation of portfolios, in commodity indices and metal exchange-traded funds.
It says that its market complements the physical. The possibility of physical delivery – supported by 635 international storage facilities and almost 600 LME listed brands – results in price convergence ensuring its prices remain in line with the physical industry.
Types of LME contracts include
- LME futures
- Physically settled contracts daily out to three months, weekly out to six months and monthly up to 123 months
- Cash settled contracts out to 15 months
- LME traded options
- American-style monthly options up to 63 months
- LME TAPOS (traded average price options) Asian-style monthly average-price options up to 63 months
- Monthly average futures
- Small-lot, cash-settled monthly futures out to 12 months
- London Mini Futures
- Small-lot, cash-settled monthly futures traded on HKEX, traded and priced in renminbi
Switching to Shanghai
Shanghai Metal Exchange Market (SHMET) describes itself as an information provider for the metals industry in China. Since its establishment on May 28, 2000, its website has become an influential and authoritative portal.
The Shanghai Spot Metal Prices were launched in May 2000 by SHMET to offer authoritative and accurate price information for base metals precious metals, minor metals, alloys, metal scraps, and other groups of metals in China.
In 2004 SHMET launched the country’s first metal spot price index: Shanghai Metal Price Index (SHMETX). It says this is the most authoritative and reliable benchmark for the non-ferrous metals industry in China.
One of three most renowned
Along with LME and Shanghai Futures Exchange, SHMET sees itself as one of the three most renowned institutions in the non-ferrous metals industry. Through its website and other professional channels, SHMET offers vast amounts of professional information and news.
This meets the needs of users in the finance and metal industries, it says. In addition, SHMET also serves as a platform for its users to interact and share their experience and needs.
SHFE: way of the future
Shanghai Futures Exchange (SHFE) says it is organised under relevant rules and regulations. It adds that as a self-regulated entity it performs functions that are specified in its bylaws and state laws and regulations.
It is regulated by the China Securities Regulatory Commission (CSRC). It lists for trading the underlying commodities of futures contracts, i.e., gold, silver, copper, aluminum, lead, steel rebar, steel wire rod, natural rubber, fuel oil and zinc.
Catching up with COMEX
Commodity Exchange Inc (today known as COMEX) was certified as a Corporation by the filing of an order of consolidation with the US Department of State in May 1933. Its certificate of incorporation was restated on 3 August 1994.
Its function was restated as being
- to provide regulate and maintain an exchange for the convenient transaction of business by its members
- to furnish other combined physical facilities and combined services for its members
- to establish just and equitable principles in the business carried on by and between its members, on by and between its members
- to maintain uniformity in rules, regulations and usages in the business
- to acquire, preserve and disseminate useful information in connection with the business throughout all markets; to decrease local risk attendant upon the business
- to promote and facilitate the business of buying, selling, dealing with and dealing in products including ferrous and non-ferrous metals
COMEX joined the CME Group with NYMEX in 2008. The merger expanded that group's suite of metals products to include several global benchmarks in precious, base and ferrous metals.
Literally another story
Metal exchanges have a vocabulary all of their own. But explanations of concepts like contango and backwardation and words and phrases like rebar and delta and cost and freight and insurance are quite literally another story for another day...