London Metal Exchange (LME)
What is the London Metal Exchange?
London Metal Exchange (LME) - one of the most influential international commodity exchanges, futures и option transactions. The exchange specializes in non-ferrous metals: copper, primary aluminum, lead, zinc, nickel, tin, aluminum alloy. In addition, the exchange trades LMEX index contractwhich includes some of the listed metals. All transactions are guaranteed by the London Clearing House. The annual turnover of funds at the LME reaches 4,500 billion dollars.
London Metal Exchange was founded in 1877 in order to provide the market with significant supplies of metals from abroad. Today, the official LME prices are used for long-term contracts by global producers and consumers.
London Metal Exchange website: www.lme.com
What metals are traded on the LME?
The London Metal Exchange includes the following types of them:
- Aluminum - sold daily for a total value of more than twelve billion dollars. Because the metal has very high liquidity, it is so popular on the market.
- Copper is the second most popular, following aluminum. Copper sales amount to approximately $3 billion per day.
- Zinc is also one of the main metals traded. The amount of zinc traded daily is about 4 billion dollars.
- Nickel - sold in relatively small quantities, amounting to about a billion dollars.
In addition to these four metals, tin and lead are traded, but in much smaller volumes than the metals listed above. In 2005 the London Metal Exchange started trading in plastics.
The trading volume on the LME is about 10% of the non-ferrous metals produced in the world.
How does the London Stock Exchange work?
There is no continuous pricing on the exchange. Trading takes place twice a day during special trading sessions (except Saturdays, Sundays, and holidays). The sessions take place in a large hall, in the center of which there are 4 curved ring benches (each for 10 seats), intended for exchange members or their authorized persons. This is the ring and the exchange ring, where deals are concluded. Deals in one exchange ring are executed by turns in several metals.
Each metal is traded for 5 minutes. According to the results of the morning session, the prices of metals are determined, which are considered to be the official LME prices. The afternoon session is similar to the morning session, but official prices are not announced after it.
Most transactions are made outside the exchange: a hundred brokers can sell and buy exchange contracts under their responsibility around the clock. Those exchange members who have offices in other time zones are responsible for metal trading when the London Exchange itself is closed.
Deals in these metals are concluded in lots; the minimum lot size of all metals is 25 tons (except for nickel, which lot is 6 tons, and tin - 5 tons).
What is special about the London Metal Exchange?
The peculiarity of the London Metal Exchange is that it is, first of all, a physical market, where delivery of real goods is guaranteed, all contracts imply real transactions, despite the fact that they are called futures. To ensure real delivery of traded commodities, the LME keeps large stocks of metal in warehouses all over the world.
The Exchange has developed a unique system for licensing these warehouses, inspecting their condition, the condition of the products stored there and their compliance with the Exchange's technical standards. The warehouse system makes it possible to save on transportation costs and simplify the access of physical metal to the global market as much as possible. A metal producer simply delivers his goods to a nearby warehouse, receives a warehouse receipt (warrant), which can be purchased from him by any major LME broker at the current price.
LME and the London Clearing House have created an electronic SWORD system. Warehousing companies still issue warrants, but now in a standard electronic format, after which they are entered into the SWORD database. All issued warrants are deposited with First National Bank of Chicago, and only the electronic versions are traded between bidders.
Only two percent of all contracts concluded end in actual metal delivery. Deliveries accurately reflect the supply and demand of the real market. Therefore, the data on changes in metal stocks in the LME warehouses are of great importance when forming exchange quotations.