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London Metal Exchange (LME)

About LME

Established for over 130 years and located in the heart of The City of London, the London Metal

Exchange is the worlds premier non-ferrous metals market.

It offers a range of futures and options contracts for non-ferrous, minor metals and steel.

The Exchange provides a transparent forum for all trading activity and as a result helps to 'discover'

what the price of material will be months and years ahead. This helps the physical industry to plan

forward in a world subject to often severe and rapid price movements. Such is the liquidity at the

Exchange that the prices discovered at the LME are recognised and relied upon by industry throughout

the world.

The LME is a highly liquid market and in 2010 achieved volumes of 120.3 million lots, equivalent to $11.6

trillion annually and $46 billion on an average business day. Based in London the LME is a global market

with an international membership and with more than 95% of its business coming from overseas.

Being a principal-to-principal market, the only organisations able to trade are its member firms, of which

there are various categories. LME members provide the physical industry with access to the market, to

the risk management tools and to the delivery mechanism. Trading takes place across three trading

platforms: through open-outcry trading in the 'Ring', through an inter-office telephone market and

through LMEselect, the Exchange's electronic trading platform.

LME Services

Transparent pricing

The LME provides a transparent forum for the trading of futures contracts for non-ferrous metals and

steel billet . As a result of this trading, daily prices are 'discovered' and published by the Exchange which

the physical industry around the world use as the basis of price negotiations for the physical sale or

purchase of metals or steel.

Risk management tools

Through its trading members, the LME offers those at all stages of the industrial raw materials supply

chain, including both buyers and sellers, the opportunity to 'hedge' their price risk, and therefore gainprotection from future adverse price movements. Hedging in this way is most efficient when the

physical and futures transactions are made basis the current LME price.

Delivery points of last resort

As a 'market of last resort', the physical non-ferrous metals and steel industries can use the Exchange's

delivery option to sell excess stock in times of over supply and as a source of material in times of

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extreme shortage. The market does not replace the normal channels for the buying and selling of

material and only a very small proportion of contracts actually result in delivery. The presence, or

'threat', of physical delivery plays a vital role in creating price convergence between the futures and the

physical market.

Trading on the LME

As a principal-to-principal market, the only organisations able to trade contracts on the LME are its

member firms, of which there are various categories. LME members provide industry with access to the

market and to the delivery mechanism.

Prospective users of the Exchange can be assured that they are dealing with professional, recognized

and experienced trading firms who are fully regulated for the capital and conduct of their business.

Regulation of the market is carried out by the LME while the UKs Financial Services Authority is

responsible for regulating the business of LME members.

Risk management - the principles of hedging

Through its trading members, the LME offers those at all stages of the metals supply chain, including

buyers and sellers, the opportunity to hedge their material price risk, and therefore gain protection from

future adverse price movements.

Hedging is the process of offsetting the risk of price movements in the physical market by locking-in a

price for the same commodity in the futures market. The reasons for doing this are clear: for a

converter, for example, it allows for better control of their raw material costs and for a producer, better

management of product pricing.

There are predominantly two motivations for a company to hedge:

To lock-in a future price which is attractive, relative to an organisations costs

To secure a commodity price fixed against an external contract

When hedging, an organisation starts with price risk exposure from its physical operations, and will buy

or sell a futures contract to offset that price exposure in the futures market. The ability to hedge means

that an organisation can decide on the amount of risk it is prepared to accept. It may wish to eliminateprice risk entirely and it can generally do so quickly and easily on the LME.

Hedging by trade and industry is the opposite of speculation as its primary purpose is to offset risk.

Speculators, however, come to the futures market with no initial risk; they assume risk by taking futures

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positions. Hedgers reduce or eliminate the chance of future losses or profits, while speculators risk

losses in order to make profits.

To be successful, a hedging programme must be devised in conjunction with a sale or purchase plan, and

all pricing must be basis the LME settlement price in order to achieve the most effective hedge and to

meet the requirements for international accounting standards. The programme can be as simple or as

complex as a company wants to make it, but it will be unique depending on that companys appetite for

risk, internal practices, pricing policies and hedging motives. Not only must a hedging programme be

well devised, but it must also be managed continuously in line with the changing circumstances of a

companys physical operations.

Branding

More than 450 brands of material from over 60 countries are approved as good delivery against LME

contracts.

Material stored in LME warehouses must be of an LME-approved brand or production of an LME-

approved producer, conforming to the specifications covering quality, shape and weight as defined by

the special contract rules of the LME.

Pricing

The London Metal Exchange (LME) publishes a set of daily reference prices that are based on the most

liquid trading sessions of the day. They are used the world over by industrial and financial participants

for purposes of referencing, hedging, physical settlement, contract negotiations and margining and are

indicators of where the market is at any point in time.

Prices Published by the LME

The most reliable prices in any market are derived from those where the greatest concentration of

trading takes place.

The LME Official and Settlement, Unofficial and Closing Prices are all based in whole (or largely) on

trading activity on the Ring.

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New Pricing Benchmark

The extension of the trading hours of LMEselect to 01.00 has seen a significant growth in early-day

liquidity. The LMEs new reference price, the Asian Benchmark, is calculated basis this early electronic

trading and acts as a start-of-day peg.

LME Reference Prices

LME Official and Settlement Price

LME Unofficial Price

LME Closing Price

LME Asian Benchmark

LME Rates

December 2011

The ring

the Ring continues to be the place where all but the most basic trades are carried out.

most commodity traders appreciate the Ring hours because they provide periods of intense focus.

The Ring model dictates five-minute periods of intense liquidity, which concentrate trading into short

bursts of activity. This type of trading is inherently transparent and attracts a variety of users to the LME,

including the professional investment community.

The Ring was formalized in 1877, when the London Metals & Mining Company opened its exchange

above a hat shop in Lombard Court. The Industrial Revolution had by now turned Britain from an

exporter of base metals into a voracious importer and that meant long delivery times. Whereas the

coffee houses had traded physical contracts, the new LME allowed merchants to forward-sell to

guarantee their prices.