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