London Metal Exchange

Introduction

London has a prominent role in global exchange-traded derivatives trading.

More than 90% of international business in non-ferrous metal futures is transacted at the London Metals Exchange.

The London Metal Exchange is the largest exchange in the world trading base metal derivative contracts.

Turnover of LME contracts rose by 11% in 2006 to reach 87m contracts, equivalent to over $ 8,000bn. Primary aluminum has been the most widely traded metal in recent years. It accounted for 47% of trading in 2006, followed by copper 24% and zinc 15%.

According to some estimates, its trading volume accounts for 95 per cent of the worlds on-exchange metal contracts. These contracts provide a means by which suppliers, processors, stockists and users world-wide can hedge the risks associated with metals trading. They also provide investment opportunities for financial institutions.

The LME offers futures and traded options contracts on six primary metals — aluminium, copper, nickel, tin, lead and zinc and two aluminum alloy contracts — as well as a composite index of these metals. In 2005 the Exchange launched the worlds first futures contracts for plastics, with the introduction of regional plastics contracts in 2007. LME also offers LMEminis, smaller-sized contracts for copper, aluminium and zinc, plus an index contract. The primary functions of the exchange are pricing, hedging and delivery: storage facilities are approved to facilitate delivery of approved brands of the metals traded. As the LME trades contracts for future delivery, it helps discover the future price of metals.

This assists industry in forward planning as the price of metals is volatile.

The London Metal Exchange is innovative while maintaining its traditional strengths and remains close to its core users by ensuring its contracts continue to meet the high expectations of industry. As a result, it is highly successful with a turnover in excess of US$ 4,500 billion per annum. It also contributes to the UKs invisible earnings to the sum of more than US$ 250 million in overseas earnings each year.

Ill try to represent the basic characteristic features of the London Metal Exchange in this work.

1. History

On an international scale the London Metal Exchange is one of the City of London’s most influential institutions. It is not widely known to the general public but it is appreciated and respected by the global mining, metals and financial communities because it provides essential services that play a part in maintaining the stability of commodity prices throughout the world.

The LME is one of the leading international commodity, futures and options exchanges. It specialises in nonferrous metals — Copper, Primary Aluminium, Lead, Zinc, Nickel, Tin, Aluminium Alloy, Silver and an index contract — LMEX, which tracks the six primary metals traded.

International trade in metals could be said to have commenced in Britain when the Romans invaded in AD43 and extracted the large deposits of copper and tin ore in Cornwall and Wales to satisfy their increasing domestic need for the production of bronze and alloys. However, the origins of the London Metal Exchange can only be traced back as far as the opening of the Royal Exchange in London in 1571 during the reign of Queen Elizabeth I. It was there that traders in metal and a range of other commodities began to meet on a regular basis. At first the traders merely dealt in physical metal for the domestic market but because Britain soon became a major exporter of metals, European merchants arrived to join in these activities.

In the early 19th century there were so many commodity traders, ship charterers and financiers using the Royal Exchange that it became impossible to do business and individual groups of traders set up shop in the nearby city coffee houses. The Jerusalem Coffee House off Cornhill became a favourite of the metal trading community. There the tradition of the Ring was born. A merchant with metal to sell would draw a circle in the sawdust on the floor and call out 'Change' at which point all those wishing to trade would assemble around the circle and make their bids.

In the early part of the 19th century the U.K. was self sufficient in copper and tin and quoted prices remained fixed for long periods. Everything changed with the advent of the Industrial Revolution when, almost overnight, the U.K. became the most technologically advanced country in the world, importing large tonnage’s from abroad.

The metal traders were now faced with a real problem because, having bought ores and concentrates from as far away as Chile and Malaya, they had no way of knowing what the price would be at the time of the ships arrival some months later. The import of large tonnages from overseas at irregular intervals put merchants and consumers seriously at risk. Technology came to their aid with the invention of the telegraph.

Inter continental lines of communication were established between the countries of the world and the change from sail to steam ships made arrival dates more predictable. Now merchants were able to anticipate the time of arrival of a cargo of metal and were able to sell it forward for delivery on a fixed date, thus protecting themselves against a fall in price during the voyage.

In 1869 the opening of the Suez Canal reduced the delivery time of tin from Malaya to match the three months delivery time for copper from Chile and this gave rise to LME’s unique system of daily trading dates for up to three months forward which still exists to this day. As delivery tonnages grew to meet the increasing demands of British industry, more and more merchants were attracted to the trade and it became necessary to find premises where they could convene each day. They first moved to the Lombard Exchange and Newsroom but once again the intrusion of other traders drove them to find new premises.

On New Years Day 1877, copper dealers heard the words ring, ring for the very first time. Only a few days earlier, traders had conducted business by gathering in groups in the crowded premises of the Lombard Exchange and Newsroom, just a few minutes walk away in Lombard Street.

But the formation of The London Metal Exchange Company on 19 December 1876, by ten firms led by Arthur Bird of Sanford & Bird, introduced more formality into the proceedings.

The members who joined the new Exchange, paying annual subscriptions of .5 5s, had long associations with the metals industry.

Some had begun their careers in the iron foundries; others had worked in copper and tin mines; a handful had worked at the docks, where they sold metals direct from the ships.

In 1877 they formed the London Metal Exchange Company and moved into their first premises over a hat shop in Lombard Court. Telegraphic links were set up and a company secretary was appointed to handle the administration. Membership increased rapidly and, after surpassing the three hundred mark, the decision was taken to move to a purpose built Exchange in Whittington Avenue, where it remained for 98 years. Then, after a period of 14 years at Plantation House in Fenchurch Street, the Exchange moved in 1994 to its current, prestigious home in Leadenhall Street.