London Metal Exchange

Transcription

Business at the LME falls into three main categories; hedging, pricing and delivery. Hedging is the process of managing metals price risk. Companies with price exposure hedge their price risk by establishing a position on the LME’s futures market. By using futures and options, companies can protect against adverse price movements, lock in agreed profit margins and protect inventory values. Aurubis is the largest copper producer in Europe with production sites in 7 European countries and uses the LME to hedge price risk on a daily basis. We are facing price risk everyday; through our physical commitments we are purchasing and selling. That means, effectively, we need to hedge to minimise or eliminate our risk from these physical contracts. Another company that uses the LME’s hedging service is LS Cable, a Korean cable manufacturer which produces a quarter of a million tonnes of copper rod a year for use in the energy and computer industries… We usually use long hedging in case we receive an order from customers and use futures trading through the LME for hedging the risk. Normally we buy copper, aluminium and lead futures for fixing the cost price which we contract with our customers. It’s not just mining companies, merchants and consumers who buy and sell metal futures. Investors buy or sell futures contracts. They take on price exposure aiming to make profits in the future. Investors are often the main counterparty in the market. They provide liquidity to enable trade users to get the price they need when they need it. The second main service the LME offers is ‘Pricing’. Today, the LME provides the world with reference prices for metals including cobalt, molybdenum, copper aluminium alloy, tin, lead, zinc, primary aluminium, nickel and steel. As a result of trading, daily prices are ‘discovered’ and published by the Exchange, which companies around the world use as a basis price in contract negotiations for the physical sale or purchase of metals and industrial materials. We are currently exclusively using the LME barometer as a price barometer for all our physical contracts. That means all physical sales and purchases are based on LME market prices. Importantly, industry can use the LME’s forward prices for planning and investment, as some LME contracts trade as far out as 10 years. LME prices are so key, in fact, that companies around the world subscribe to them either through an extended global network of data and intelligence companies or direct through the Exchange’s own data service, LMElive. The third main service is the physical delivery of material. Industry can use the LME as the market of last resort. They can deliver excess stock in times of over supply and take out material in times of extreme shortage. In reality, physical delivery occurs only in a very small percentage of cases on the LME as most organisations use the Exchange for hedging and investment purposes, but the prospect of delivery is crucial to creating price convergence. To support this mechanism the Exchange approves and licenses metals brands and warehouses around the world.. That includes companies like C. Steinweg Handelsveem B.V. which offers storage, handling, forwarding, chartering and other related logistics services. We have a lot of LME warehouses, dozens of them. What you see around me is nickel cathodes, copper cathodes, and you see aluminium T-bars and aluminium ingots. These warehouses which we have are all approved for all kinds of non-ferrous metals traded on the LME The possibility of the LME to take delivery and to deliver to the market is a vital. Sometimes you are short in production because something is not working as it should be; you take delivery from the LME and here on the Hamburg site, we have a warehouse facility where we are able to take delivery if something goes wrong. Each day, the LME compiles stock reports detailing the levels of metal stored in warehouses and this information gives an indication of supply and demand. The supply and demand of base metals, especially in copper, are very volatile and if we can’t meet a factories requirement in copper due to the tight supply, we must find another supply source. Here the stocks of LME warehouses can be a good alternative. On the contrary, surplus stocks can be delivered from our plant into LME warehouses and this means we can manage the stocks at the appropriate level. The material which will be leaving the LME warehouses might go to different industries, and in different directions. The aluminium could go to the car manufacturing industry or the building industry.