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LME Copper is a group of spot, forward, and futures contracts, trading on the London Metal Exchange (LME), for delivery of Copper (Grade A), that can be used for price hedging, physical delivery of sales or purchases, investment, and speculation. [1] [2]
As of 2019 [update] , LME Copper contracts are associated with 144,675 tonnes of physical copper stored in LME approved warehouses around the world, [3] or around 0.7% of 2019 world copper production of 20.6 million tonnes. [4]
Despite the small share of physical copper associated with LME Copper contracts, their prices act as reference prices for physical global copper transactions. [5] This practice started in 1966, when Zambia, Chile, and most Copper-producing countries abandoned fixed price copper contracts, and announced that they would set copper contract prices based the average monthly price of the nearest contract month LME Copper futures contract. This pattern of using LME futures contract prices as reference prices for physical transactions spread to other base metals in the 1970s, and for Aluminium in the 1980s. [6]
LME Copper contracts trade on the London Metal Exchange, which began trading in the metal at the start of the exchange in 1877. [1] The contracts require physical delivery of the asset for settlement, and deliverable assets for the contracts are 25 tonnes of Grade A copper cathode. The contracts 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. [7] Contracts are organized along LME's prompt date (or delivery date) structure.
LME offers three groups of LME Copper 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, ... 2030-06-19, 2030-07-17, and 2030-08-21 are available for trading. [8]
The origins of the LME prompt date system, in particular the three months daily prompt date system, actually originated with LME Copper trading at the beginning of the exchange. The opening of the Suez Canal in 1869 reduced the London delivery time of Tin from Malaya to match the three months delivery time for Copper from Chile. When the LME was founded in 1877 based on Copper and Tin trading, the exchange instituted the daily prompt date contracts to match the delivery times of those commodities. [9]
LME Copper contracts with delivery dates up to 123 months into the future are available, and prices of those contracts can produce forecasts of the spot price of Copper at those delivery times. However, LME Copper price forecasts of spot copper prices were found to exhibit biases. [10]
LME Copper futures prices are also a part of the S&P GSCI commodity index, which is a benchmark index widely followed in financial markets by traders and institutional investors. Its weighting in these commodity indices give LME Copper futures prices non-trivial influence on returns on a wide range of investment funds and portfolios. Conversely, traders and investors have become non-trivial participants in the market for LME Copper contracts, and have had a better track record than commercial participants in the copper supply chain at predicting copper industrial cycles. [11]
LME Copper has been used as important financial and economic signals. Contract prices have been used as signals for general financial market conditions and equity market return. [12] They have also been used as leading indicators for economic activity and business cycles. [13]
The Chicago Mercantile Exchange (CME) and the Shanghai Futures Exchange (SHFE) also offer Copper futures contracts. Market studies have shown that all three markets are closely linked, and that LME traded copper contracts are the dominant source of price discovery for the other exchanges. [14]
Financial market conventions and empirical studies have grouped copper futures contracts with other base metals futures contracts together as an asset class or a sub-asset class. The Base Metals grouping usually includes futures contracts on Aluminium (sometimes including Aluminium Alloy contracts), Copper, Lead, Nickel, Tin, and Zinc, and they are also sometimes called Industrial Metals, Non-ferrous Metals, and Non-precious Metals. All of the metals in this group have associated LME contracts available for trading. [12]
From 1986 to 1996, the head Copper trader of Sumitomo corporation, Yasuo Hamanaka, sought to manipulate the LME Copper market by secretly building a dominant market position in LME Copper spot and futures markets. Through facetious purchasing and sale agreements, Hamanaka established the illusion of a large commercial Copper operation at Sumitomo, which allowed him to purchase large amounts of LME Copper futures contracts and warrants to corner the LME Copper market. By November 24, 1995, Hamanaka controlled 93% of all of outstanding LME copper warrants, which are claims on physical copper in the LME warehouse system. Hamanaka's Copper market position led world copper prices to rise rapidly, which led to physical copper leaving COMEX warehouses to LME warehouses, notably LME's Long Beach warehouse. The rapid movement of Copper prices and of physical Copper out of COMEX warehouses lead to investigations by the Commodity Futures Trading Commission (CFTC) and the Securities and Investments Board (SIB). Ultimately, Sumitomo cooperated with these investigations and dismissed Hamanaka, which lead Hamanaka to confess in 1996. Hamanaka's speculative position contributed to LME Contract prices to rise to $2800 per tonne in May 1996, and Sumitomo's subsequent unwinding of that position contributed to those same prices to plunge to $1785 per tonne, a two and a half year low, on June 25, 1996 almost two months later. The affair costed Sumitomo $2.6 billion USD in losses. [15] [16]
In response to the affair, LME began to publish more meaningful open interest data, information on large warrant and trading positions, and daily LME warehouse stocks for all relevant LME contracts, including LME Copper contracts. [17] The affair also led seventeen commodity market regulators from sixteen countries met at the Tokyo Commodity Futures Markets Regulators' Conference to discuss proposed regulatory oversight of the world's commodity futures markets in 1997. The market regulators endorsed futures markets best practices, standards of market surveillance, and intentions for regulatory information sharing among the endorsing countries. [18]
The State Reserves Bureau Copper Scandal refers to a loss of approximately $150 million USD as a result of trading LME Copper futures contracts at the London Metal Exchange (LME) by rogue trader Liu Qibing, who was a trader for the Import and Export Department of the State Regulation Centre for Supply Reserves (SRCSR), the trading agency for the State Reserve Bureau (SRB) of China in 2005. [19]
A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investing in commodities. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management.
Normal backwardation, also sometimes called backwardation, is the market condition where the price of a commodity's forward or futures contract is trading below the expected spot price at contract maturity. The resulting futures or forward curve would typically be downward sloping, since contracts for further dates would typically trade at even lower prices. In practice, the expected future spot price is unknown, and the term "backwardation" may refer to "positive basis", which occurs when the current spot price exceeds the price of the future.
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The London Metal Exchange (LME) is a futures and forwards exchange in London, United Kingdom with the world's largest market in standardised forward contracts, futures contracts and options on base metals. The exchange also offers contracts on ferrous metals and precious metals. The company also allows for cash trading. It offers hedging, worldwide reference pricing, and the option of physical delivery to settle contracts.
In finance, a futures contract is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset transacted is usually a commodity or financial instrument. The predetermined price of the contract is known as the forward price or delivery price. The specified time in the future when delivery and payment occur is known as the delivery date. Because it derives its value from the value of the underlying asset, a futures contract is a derivative.
A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. Futures exchanges provide physical or electronic trading venues, details of standardized contracts, market and price data, clearing houses, exchange self-regulations, margin mechanisms, settlement procedures, delivery times, delivery procedures and other services to foster trading in futures contracts. Futures exchanges can be organized as non-profit member-owned organizations or as for-profit organizations. Futures exchanges can be integrated under the same brand name or organization with other types of exchanges, such as stock markets, options markets, and bond markets. Non-profit member-owned futures exchanges benefit their members, who earn commissions and revenue acting as brokers or market makers. For-profit futures exchanges earn most of their revenue from trading and clearing fees.
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The New York Mercantile Exchange (NYMEX) is a commodity futures exchange owned and operated by CME Group of Chicago. NYMEX is located at One North End Avenue in Brookfield Place in the Battery Park City section of Manhattan, New York City.
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Multi Commodity Exchange of India Ltd (MCX) is a commodity exchange based in India. It was established in 2003 by the Government of India and is currently based in Mumbai. It is India's largest commodity derivatives exchange. The average daily turnover of commodity futures contracts increased by 26% to ₹32,424 crore during FY2019-20, as against ₹25,648 crore in FY2018-19. The total turnover of commodity futures traded on the Exchange stood at ₹83.98 lakh crore in FY2019-20. MCX offers options trading in gold and futures trading in non-ferrous metals, bullion, energy, and a number of agricultural commodities.
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The Sumitomo copper affair refers to a metal trading scandal in 1996 involving Yasuo Hamanaka, the chief copper trader of the Japanese trading house Sumitomo Corporation (Sumitomo). The scandal involves unauthorized trading over a 10-year period by Hamanaka, which led Sumitomo to announce US$1.8 billion in related losses in 1996 when Hamanaka's trading was discovered, and more related losses subsequently. The scandal also involved Hamanaka's attempts to corner the entire world's copper market through LME Copper futures contracts on the London Metal Exchange (LME).
The State Reserves Bureau copper scandal refers to a loss of approximately US$150 million as a result of trading LME Copper futures contracts at the London Metal Exchange (LME) by rogue trader Liu Qibing, who was the chief trader for the Import and Export Department of the State Regulation Centre for Supply Reserves (SRCSR), the trading agency for the State Reserve Bureau (SRB) of China in 2005.
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LME Nickel stands for a group of spot, forward, and futures contracts, trading on the London Metal Exchange (LME), for delivery of primary Nickel that can be used for price hedging, physical delivery of sales or purchases, investment, and speculation. Producers, semi-fabricators, consumers, recyclers, and merchants can use Nickel futures contracts to hedge Nickel price risks and to reference prices. As of December 31, 2019, LME Nickel is associated with 153,318 tonnes of physical Nickel stored in 500 LME approved warehouses around the world. This is 5.67% of the 2019 global estimated mined Nickel production of 2.7 million tonnes. Despite the low share of physical Nickel associated with LME Nickel contracts, global physical Nickel transactions are usually based on LME Nickel prices. This practice began in the 1970s to 1982, when producer Nickel prices, especially Canadian producer prices collapsed, and the industry switched to LME prices.
LME Zinc stands for a group of spot, forward, and futures contracts traded on the London Metal Exchange (LME), for delivery of special high-grade Zinc with a 99.995% purity minimum that can be used for price hedging, physical delivery of sales or purchases, investment, and speculation. Producers, semi-fabricators, consumers, recyclers, and merchants can use Zinc futures contracts to hedge Zinc price risks and to reference prices.