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What Does LME Stand For And Why Is It Important To Me?

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You may have heard the abbreviation LME thrown around at various times and have been wondering what it stands for. Even veterans of the industry may not be entirely clear on its exact meaning. LME is the abbreviation for the London Metal Exchange, and while it may not seem important to the everyday operations of someone in the manufacturing industry, it actually has significant implications on your business.

The London Metal Exchange is the world’s largest futures exchange for options and futures contracts for various industrial metals. The Exchange offers daily contracts up to three months from the trade date, weekly contracts that can go for six months, and monthly contracts that can go for over a decade, in addition to cash trading, hedging, and worldwide reference pricing. It even allows for the option of physical delivery in order to settle contracts.

The London Metal Exchange occupies a place of prime importance when it comes to determining the prices of raw metals. In fact, the majority of all non-ferrous metal futures are contracted on the exchange, which in 2017 amounted to 12.7 trillion dollars, or 3.5 billion tons of raw materials. The exchange brings together buyers and sellers from around the world and forms a regulated market that helps to establish world metal prices.

The History Of The London Metal Exchange

The origins of the metal trading market date back to 1571, when the Royal Exchange was opened in London. Previous to this time, traders used coffee houses with a chalk circle marked on the floor to conduct business. Initially, they dealt exclusively in physical metal that was intended for the domestic market, but it wasn’t long before foreign merchants arrived with the intention of exporting metal to their home countries.

As the scale and breadth of the metals trade continued to grow, it got to the point where the exchange wasn’t large enough to handle all of the commerce. By the 1800’s, the number of commodity traders, ship charterers, and financiers exceeded the capacity of the Royal Exchange. This led to the London Metal Market and Exchange Company being founded in 1877.

The first metal to be traded was copper. Lead and zinc were added soon thereafter, but these did not gain official trade status until 1920. Over time, new metals were added as their prominence in modern industry grew, including aluminum in 1978, nickel in 1979, tin in 1989, aluminum alloy in 1992, steel in 2008, and cobalt and molybdenum in 2010.

The standard futures contract generally calls for a commodity to be delivered after three months. This became the tradition because that was the amount of time it took for copper to be shipped from Chile to London in 1877. Of course today, futures contracts can be for many different lengths of time.

In December 2012, the London Metals Exchange was acquired by Hong Kong Exchanges & Clearing Limited, which has led to a newer, more modern marketplace, but one that still serves as the center of the global metal trade. Among other changes, gold and silver futures contracts were introduced to the exchange in 2017.

What Is Midwest Spot Aluminum?

Midwest Spot Aluminum refers to what is known as a spot contract, also referred to as a spot transaction, or simply a spot. This is a contract for the buying or selling of a commodity, security, or currency, (in this case aluminum) for immediate settlement. This means that the payment and delivery will occur on the spot date, which in general is two business days after the trade is finalized. The price or rate of the deal is known as the spot price. This is in contrast to future contracts, as explained above.

Most manufacturers, especially those working at a smaller scale, don’t tend to concern themselves about future contracts. They deal in spot prices. But what they may not realize is that the spot price is largely determined by the futures trading that goes on at the London Metals Exchange.

The Midwest spot price for aluminum means that in the Midwest region, the price of aluminum is this amount. The costs are consistently more than the London Market Exchange prices, because the cost reflects the added delivery costs. Charts are available that show prices in your area for your metal of choice, not only right this moment, but for months in advance.

Why should you worry about these price charts? Because there could be an advantage for paying for a metal at a price right now, with a delayed delivery at a later date. This can help manufacturers avoid the storage and carry costs that would be involved if they had the metal delivered in the present.

This situation is typically referred to as a contango. This means that the futures price of aluminum is higher than the expected spot price at the time of maturity of the futures contract. While all of this can be quite complicated, understanding the nature of the futures market can help manufacturers negotiate the sometimes-inscrutable pricing conventions in order to secure the best possible prices.

Summary 

Clinton Aluminum does more than just supply raw materials. We make it a point of pride to be true partners, working with our customers at every step of the production process as required. This means our experienced team will not only help in the selection of the right materials, but we’ll do our best to get you the best possible price. Our extensive knowledge of industry best practices allows our clients to save both time and money.

Clinton is the Midwest’s leading supplier of aluminum and stainless steel products. As such, our success rests on our ability to help our customers succeed. Contact a member of our knowledgeable and friendly staff today to learn how we can assist you with all of your aluminum and stainless steel needs.

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