LME Aluminium
Group of contracts traded on London Metal Exchange
From Wikipedia, the free encyclopedia
The LME Aluminum is a group of spot, forward, and futures contracts traded on the London Metal Exchange (LME), for delivery of primary aluminum. The contracts are used for price hedging, physical delivery of sales or purchases, investment, and speculation.[1] Producers, semi-fabricators, consumers, recyclers, and merchants can use aluminum futures contracts to hedge aluminum price risks and to reference prices.[2] Some companies that use the LME Aluminum contracts to hedge aluminum prices include General Motors, Boeing, and Alcoa.[3][4][5]
In 2019, the system of the LME Aluminum contracts was associated with about 1.49 million tonnes of physical primary aluminum stored in over 500 warehouses around the world.[6][7][8][9] At the time, world production of primary aluminum was 63.70 million tonnes, suggesting that the LME Aluminum contracts represented approximately 2.3% of the world's annual production.[10]
Contract description
LME Aluminum contracts trade on the London Metal Exchange, which introduced them in 1978.[11] The contracts require physical delivery of the asset for settlement, and deliverable assets for the contracts are 25 tonnes of high-grade primary aluminum. 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 LME Select, 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 aluminum futures also have reduced minimum tick sizes at $0.01 per tonne.[12] Contracts are organized along LME's prompt date (or delivery date) structure.
Secondary uses
Prices from LME Aluminum futures contracts are widely used to help set aluminum prices more generally. Because futures markets are open to many buyers and sellers[13] 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.[13]
For these reasons, LME Aluminum futures prices are often used as reference prices for aluminum transactions, even when the metal itself is bought and sold outside the exchange.[14]
LME Aluminum 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 Aluminum prices can affect the performance of a wide range of investment portfolios.[15][16]
Related derivatives
LME Aluminum also offers other derivatives related to primary aluminum, such as Options, TAPOs, Monthly Average Futures, and LME minis. Aluminum products like aluminium alloys and Alumina also have their own LME contracts for trading.[17]
Aluminum contracts are also available for trading on the Chicago Mercantile Exchange (CME). The CME Aluminum futures contract are for 25 metric tonnes of primary aluminum and prices are quoted in US dollars per tonne. 60 consecutive monthly CME Aluminum contracts are available for trading.[18]
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.[19]
Warehouse controversy
Stocks of aluminum held in LME-approved warehouses have been the subject of controversy.
In 2013, several aluminum 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 aluminum from warehouses. This, the lawsuit claimed, had the effect of reducing available supply and thus driving up prices and delivery premiums—the extra costs paid above the base exchange price to cover delivery, storage, and local supply conditions.[20]
At the same time, the United States Senate Permanent Subcommittee on Investigations examined the role of Goldman Sachs in the aluminum market,[21] focusing on its ownership of LME-approved warehouses and the accumulation of aluminum warrants linked to futures contracts.[22]