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The London Metal Exchange and Midwest Spot Aluminum Ingot Pricing Mechanisms

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The London Metal Exchange and Midwest Spot Aluminum Ingot Pricing Mechanisms

The price of aluminum is in constant flux, and this has a great deal to do with the London Metal Exchange and its correlation to Midwest spot aluminum ingot pricing mechanisms.  What factors go into how raw aluminum gets priced and how do the ups and downs of an overseas commodities exchange impact domestic aluminum prices?

The aluminum market has seen a great deal of volatility over the past couple of years.  Starting with the US tariffs being placed on metal imports from China, Canada, and other countries, and continuing with the crisis created by Covid-19 and the overall economic downturn, it’s hard to guess what the price of aluminum will be from one week to the next.

So what role does the London Metal Exchange play in all of this, and how does it effect the prices of aluminum ingot in the Midwest?

What is the London Metal Exchange?

The London Metal Exchange (LME) is a futures exchange market based in the United Kingdom that is instrumental in setting global metal prices.  It is currently the world’s largest options and futures market for base and other metals.  The London Metal Exchange offers contracts with daily expiration dates of up to three months from trade date, as well as weekly contracts up to six months in length, and monthly contracts up to ten years.

For those unfamiliar with financial trading, a futures contract is a legal agreement that stipulates the purchasing or selling of some good (or financial instrument) at a predetermined price at a specific time in the future.  The agreed upon price is referred to as the forward price, while the agreed upon time is the delivery date.  The nature of the agreement involves the buyer taking on the obligation to purchase and receive the asset in question at the time when the futures contract expires, while the seller of the contract is accepting the obligation to deliver the underlying asset at the expiration date.

In 1877 traders established the London Metals and Mining Company.  The name would later be changed to London Metal Exchange.  As an interesting side note, aluminum was not added to the exchange until 1978.  It should be noted that the futures price is separate from (though connected to) the spot price, which will be explained later in this post.

How The London Metal Exchange Works

A search for aluminum on the London Metal Exchange will turn up a confusing mix of charts and graphs.  A variety of prices will appear, labeled Cash, Three Months, and the like, with different numbers for Bid and Offer, as well as an official price curve.  This will be difficult to decipher for anyone who isn’t well versed in futures exchange.

The way the London Metal Exchange works is that participants purchase and sell options to transfer and take on price risk. While it is possible for contracts to be settled using the physical stock that is stored in LME warehouses, this is pretty rare. In fact, less than 1% of trades on the exchange result in metal being delivered.  Rather, most participants are using the LME to hedge or gain insight into the price curve.  Therefore, more than 99% of contracts are closed before settlement

In this way, the LME helps to set global prices for metal commodities, including aluminum.  While it may not matter to a manufacturer who wants to make an aluminum purchase right now, the futures prices have a direct impact on the current spot prices.

What determines the global price of aluminum?

For popular metals such as copper, zinc and aluminum, many factors go into determining how much it can be purchased for in the Midwest.  For aluminum specifically, it is one of the most widely used metals in the world, with uses found in nearly every industry.  This means that price fluctuations are common, especially as demand changes in different regions.

Another important concern is the price of electricity.  The smelting of aluminum is an energy intensive process, and so even a slight increase in electricity prices will impact the final price of aluminum ingot.  In fact, a steep increase in the price of electricity in a certain region may spur smelters in the area to relocate.

Another huge contributor to the final market price of aluminum has to do with transportation costs.  This manifests in a few different ways.  First, the cost of shipping must be figured into any aluminum purchases, but it’s a more complicated issue that just that.  The transportation industry is a huge market for aluminum, in particular automobiles and aerospace. However, as more advanced materials come onto the market, this can cut the demand for aluminum, thus lowering the price.

Likewise, the construction and building industries also make up a significant amount of the aluminum demand.  In times of economic turndown, as we are currently experiencing, this can adversely affect the need for aluminum.  Conversely, in times of heavy growth, the cost of aluminum can skyrocket in a short amount of time as production strives to catch up.

Because aluminum is a global commodity that’s produced in several places around the world, another factor that impacts the global price is exchange rates.  If a particular currency, such as in Brazil or India, is being impacted by events that have little to do with aluminum production, it can still affect the aluminum trade.

What is the Midwest premium?

Finally, the aluminum price that is in place at a given moment at a particular location is known as the spot price.  The spot price is defined as the current available price in a specified market that the commodity, in this case aluminum ingot, can be bought or sold for immediate delivery.

The term Midwest premium refers to the current regional price of aluminum in the Midwest United States.  While some people assume this is the fee tacked onto the global price for shipping and storage, this is not technically the case.  Rather it is just the term for the standard regional price.

Buying aluminum doesn’t need to be complicated.  Clinton Aluminum provides high quality materials and peerless customer service at a fair market price, dictated in part by the global pricing mechanisms described in this article.  Contact us today to learn more.

 

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