LME Aluminium

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The LME Aluminium ("LME Aluminum" in American and Canadian english language) refers to a group of spot, forward, and futures contracts traded on the London Metal Exchange (LME), for delivery of primary aluminium. These contracts can be used for price hedging, physical delivery of sales or purchases, investment, and speculation. [1] Producers, semi-fabricators, consumers, recyclers, and merchants can use aluminium futures contracts to hedge aluminium price risks and to reference prices. [2] Some companies that use the LME Aluminium contracts to hedge aluminium prices include General Motors, Boeing, and Alcoa. [3] [4] [5]

Contents

As of late 2019, the system of the LME Aluminium contracts was associated with 1.27 to 1.49 million tonnes of physical primary aluminium stored in 500 to 700 warehouses around the world, out of 2.78 million tonnes of global reported warehoused aluminium, and 11.78 million tonnes of global reported and unreported warehoused aluminium. [6] [7] [8] [9] For comparison, world production of primary aluminium in 2019 was 63.70 million tonnes, which implies that physical aluminium tied up in the LME - warehouse system for the LME Aluminium contracts only makes up to 2.0% - 2.3% of world's annual production. [10] Despite the small proportion of physical aluminium tied to the LME contracts, they have become an important source of hedging and price discovery. [11]

Contract description

LME Aluminium contracts trade on the London Metal Exchange, which introduced them in 1978. [12] The contracts require physical delivery of the asset for settlement, and deliverable assets for the contracts are 25 tonnes of high-grade primary aluminium. The contract prices are quoted in US dollars per tonne. LME prices have minimum tick sizes of $0.50 per tonne (or $12.50 for one contract) for open outcry trading in the LME Ring and electronic trading on LMEselect, while minimum tick sizes are reduced for inter-office telephone trading to $0.01 per tonne (or $0.50 for one contract). Carry trades involving aluminium futures also have reduced minimum tick sizes at $0.01 per tonne. [13] Contracts are organized along LME's prompt date (or delivery date) structure.

Prompt date structure

LME Aluminium offers three groups of LME Aluminium contracts with daily, weekly, and monthly delivery dates. Contracts with daily settlement dates are available from two days to three months in the future, which means that on 2020-05-12, contracts with daily delivery dates for 2020-05-14, 2020-05-18, 2020-05-19 ... 2020-08-10, 2020-08-11, and 2020-08-12 are available for trading. Contracts with weekly settlement dates are available from three months to six months in the future, which means that on 2020-05-12, contracts with weekly delivery dates for 2020-08-12, 2020-08-19, 2020-08-26 ... 2020-11-12, 2020-11-18, and 2020-11-25 are available for trading. Contracts with monthly settlement dates are available from six months to 123 months in the future, which means that on 2020-05-12, contracts with monthly delivery dates for 2020-05-20, 2020-06-17, 2020-07-15, ... 2020-06-19, 2020-07-17, and 2030-08-21 are available for trading. [14]

Secondary uses

Prices from LME Aluminium futures contracts are widely used to help set aluminium prices more generally. Because futures markets are open to many buyers and sellers and have lower trading costs than physical (cash) markets, they tend to reflect supply and demand more accurately. Prices are also publicly available, which makes it harder for a small number of large companies to control prices.

For these reasons, LME Aluminium futures prices are often used as reference prices for aluminium transactions, even when the metal itself is bought and sold outside the exchange. [15]

LME Aluminium prices are also included in major commodity indices, such as the Bloomberg Commodity Index and the S&P GSCI commodity index. Because many investment funds track these indices, changes in LME Aluminium prices can affect the performance of a wide range of investment portfolios. [16] [17]

LME Aluminium also offers other derivatives related to primary aluminium. Options, TAPOs, Monthly Average Futures, and LMEminis. Aluminium products like aluminium alloys and Alumina also have their own LME contracts for trading. [18]

Aluminum contracts are also available for trading on the Chicago Mercantile Exchange (CME). The CME Aluminium futures contract are for 25 metric tonnes of primary aluminium and prices are quoted in US dollars per tonne. 60 consecutive monthly CME Aluminium contracts are available for trading. [19]

The Shanghai Futures Exchange (SHFE) offers aluminum futures contracts for trading as well. SHFE contracts are for 5 metric tonnes of primary aluminum and prices are quoted in Yuan per tonne. [20]

Warehouse controversy

Stocks of aluminium held in LME-approved warehouses have been the subject of controversy.

In 2013, several aluminium users filed lawsuits alleging that the LME, warehouse operator Metro International Trade Services, and major commodity and financial firms colluded between 2009 and 2012 to delay the release of aluminium from warehouses, reducing available supply and driving up prices and delivery premiums—the extra costs paid above the base exchange price to cover delivery, storage, and local supply conditions. [21]

At the same time, the United States Senate Permanent Subcommittee on Investigations examined the role of Goldman Sachs in the aluminium market, [22] focusing on its ownership of LME-approved warehouses and the accumulation of aluminium warrants linked to futures contracts. [23]

References

  1. ↑ Novelis Inc. (2014-11-18). "Written Statement of Novelis Inc. to The Permanent Subcommittee on Investigations hearing on "Wall Street Bank Involvement With Physical Commodities"" (PDF). U.S. Senate Committee on Homeland Security & Governmental Affairs. p. 8. Retrieved 2020-05-10.
  2. ↑ Sampson, Raymond (2014-11-18). "Understanding the LME". Recycling Today. p. 8. Retrieved 2020-05-10.
  3. ↑ "ALUMINIUM: The consumer view on long-term hedging". Fast Market Metal Bulletin. Retrieved 2020-05-13.
  4. ↑ "The Boeing Company 2019 Annual Report" (PDF). Alcoa. Retrieved 2020-05-13.
  5. ↑ "Alcoa 2019 Annual Report" (PDF). Alcoa. Retrieved 2020-05-13.[ permanent dead link ]
  6. ↑ Treadgold, Tim (2019-12-03). "Aluminium Surplus Worsens, Signaling A Price Fall And Plant Closures In The New Year". Forbes. Retrieved 2020-05-13.[ dead link ]
  7. ↑ Home, Andy (2020-01-14). "Column: Another spin of the giant LME aluminium stocks carousel". Forbes. Archived from the original on January 14, 2020. Retrieved 2020-05-13.
  8. ↑ "Approved Warehouses". London Metal Exchange. Retrieved 2020-05-13.
  9. ↑ "How the World Aluminium Market Works". All About Aluminium. Retrieved 2020-05-13.
  10. ↑ "Primary Aluminium Production". The International Aluminium Institute. 2020-04-20. Retrieved 2020-05-14.
  11. ↑ Figuerola-Ferretti, Isabel; Gilbert, Christopher L. (2005). "Price Discovery in the Aluminium Market". The Journal of Futures Markets. 25 (10). Wiley Periodicals, Inc.: 967–988. doi:10.1002/fut.20173.
  12. ↑ "LME Aluminium Factsheet" (PDF). London Metal Exchange. Retrieved 2020-05-11.
  13. ↑ "Futures Contract Specifications: LME Aluminium". London Metal Exchange. Retrieved 2020-05-11.
  14. ↑ "A Detailed Guide to the London Metal Exchange" (PDF). London Metal Exchange. Retrieved 2020-05-12.
  15. ↑ Figuerola-Ferretti, Isabel; Gilbert, Christopher L. (2005). "Price Discovery in the Aluminium Market". The Journal of Futures Markets. 25 (10). Wiley Periodicals, Inc.: 967–988. doi:10.1002/fut.20173.
  16. ↑ "Bloomberg Commodity Index 2020 Target Weights Announced". Bloomberg Professional Services. Bloomberg L.p. Bloomberg. Retrieved 2020-05-06.
  17. ↑ "S&P GSCI Methodology" (PDF). S&P Dow Jones Indices. S&P Global. p. 26. Retrieved 2020-05-06.
  18. ↑ "LME Aluminium Factsheet" (PDF). London Metal Exchange. Retrieved 2020-05-11.
  19. ↑ "Aluminium Futures Contract Specs". CME Group. Retrieved 2020-05-12.
  20. ↑ "AAluminum Contract Specifications". Shanghai Futures Exchange. Retrieved 2020-05-14.
  21. ↑ "Aluminum antitrust lawsuits put warehouses in spotlight". American Metal Market. 2013-09-30. Retrieved 2020-06-30.
  22. ↑ "WALL STREET BANK INVOLVEMENT WITH PHYSICAL COMMODITIES" (PDF). US Senate Committee on Homeland Security and Governmental Affairs. Retrieved 30 June 2020.
  23. ↑ Novelis Inc. (2014-11-18). "Written Statement of Novelis Inc. to The Permanent Subcommittee on Investigations hearing on "Wall Street Bank Involvement With Physical Commodities"" (PDF). U.S. Senate Committee on Homeland Security & Governmental Affairs. pp. 1–3. Retrieved 2020-06-29.
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