LME Copper
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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), which 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 reportedly stored in LME-approved warehouses around the world,[3] or around 0.7% of 2019 world copper production of 20.6 million tonnes.[4][5]
Despite the small share of physical copper associated with LME Copper contracts, their prices act as reference prices for global physical copper transactions.[6] This practice began 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 on 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 to aluminium in the 1980s.[7]
Contract description
LME Copper contracts trade on the London Metal Exchange, which began trading in the metal at the founding 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 contract prices are quoted in US dollars per tonne. LME prices have minimum tick sizes of US$0.5 per tonne (or US$12.5 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 US$0.01 per tonne (or US$0.5 for one contract). Carry trades involving Aluminium futures also have reduced minimum tick sizes at US$0.01 per tonne.[8] Contracts are organized along LME's prompt date (or delivery date) structure.
Prompt 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, for example on 2020-05-12, contracts were available for 2020-05-14, 2020-05-18, 2020-05-19, 2020-08-10, 2020-08-11, and 2020-08-12. 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.[9]
The origins of the LME prompt date system, particularly the three-month daily prompt date system, date back to 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-month 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.[10]
Non-commercial uses
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.[11]
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 gives LME Copper futures prices a 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.[12]
LME Copper has been used as an important financial and economic signal. Contract prices have been used as signals for general financial market conditions and equity market returns.[13] They have also been used as leading indicators for economic activity and business cycles.[14]
Related derivatives
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.[15]
Financial market conventions and empirical studies have grouped copper futures contracts with other base metals futures contracts 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.[13]