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Agenda
• Introduction to the LME
• Hedging concepts
• Warehouse reforms and pricing impacts
• New LME products and services
– Focus on the LME Premium Aluminium contracts
• Questions
• Ring tour (4:30 – 5:00 pm)
• Refreshments
3
The London Metal Exchange
LME was established in 1877 in response to industrial revolution
• High metal consumption relying on imports from abroad
• The need to hedge risk of price fluctuations during long shipping voyages
• Shipping of Copper from Chile and Tin from Malaysia took three months to arrive in
London
LME was acquired by Hong Kong Exchanges and Clearing (HKEx) in December 2012
4
The London Metal Exchange New contracts have been added to the initial Copper and Tin, over the past ~100
years
1877
Copper
& Tin
1920
Lead &
Zinc
1978
Primary
Aluminium
1979
Nickel
1992
Aluminium
Alloy
2002
NASAAC
2008
Steel Billet
2010 Cobalt &
Molybdenum
2015 Aluminium
Premiums &
Ferrous suite
5
LME Volumes
LME trading volume, 2002 – 2014
• LME trading represents c. 80% of the global exchange traded base metals volume
• In 2014 a total of 177.2 million lots were traded (3.5% increase vs. 2013)
– $14.9 trillion notional value, or
– 4 billion tonnes of metal
8
Exchange – LME pricing LME prices reflect the material activities of the market
Supply & demand
Daily
Trans-parent
Trusted
Regulated
Robust
LME prices
9
What does the LME price represent?
The LME price represents material:
• of an LME registered brand
• stored in an LME approved warehouse
• duty unpaid – no taxes / VAT etc
• buyer to pay for delivery out of warehouse
10
LME price minus discount
Low Metal Content
Smelting Concentration Mining Semi
Fabricated Products
Metal Products
The metals value chain It does not matter what stage of the metals value chain you are – the LME price is
relevant!
Ingot
Billet Cathode
Wire
Cans
Rebar
LME price minus discount LME price
LME price plus production costs and profit
margin
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How to use an LME price
LME price
+ / – value chain adjustment
+ / – grade differential versus LME grade
+ / – differential for favoured brand
+ / – differential for favoured location versus the LME approved delivery point
+ / – packaging differential
+ / – delivery differential to consumer works
+ / – timing differences
+ / – volume or other discounts / premiums etc.
= Physical sales price
Metal consumers and producers use the LME price as the reference basis for
physical transactions
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What stops you hedging?
Speculation Complicated Pressure off
sourcing
Liquidity Shareholder
exposure Cost
Pricing not hedging
Creating hedging
team
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What is hedging?
• Protects against adverse price movements
– By hedging you reduce the uncertainty and your exposure to price movements
• Locks in an agreed profit margin
– The financial hedge allows the buyer/seller to lock in a certain price to be paid/received in the future
• Protects inventory value
– If hedged, any losses on the physical market (affecting the inventory value) are offset by an
increased value in the financial position
Establishing a position in a commodity futures market (LME) which is equal and
opposite to a risk on a physical market
15
Stock levels demonstrate LME market relevance
LME closing stock (23-Apr-92 – 31-Jul-15)
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
Mil
lio
n t
on
nes
North America Europe Asia Other
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LME warehouse reforms 12 item reform package announced in 2013
Best-practice information barrier policy
Enhanced LME investigation and action powers for artificial queues
Premium contracts (rule changes to facilitate premium hedging solutions)
Separate load-out rate for steel
Legal review of the LME Warehouse Agreement Logistical review
Separate load-out rate for steel
Cap rents in queues Assess structural solutions to high charges
LILO Rule
Alr
ea
dy d
eli
ve
red
In
pro
gre
ss
Commitments of Traders transparency
Publication of queues and stock data by warehouse
Creation of Physical Market Committee plus ongoing six-monthly reviews
Enhanced LME investigation and action powers for artificial queues
Further load-out rate increase
Separate load-out rate for aluminium alloys
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0
100
200
300
400
500
600
700
800
Waitin
g tim
e (
ca
len
da
r d
ays)
Impala Antwerp Pacorini Johor Pacorini Vlissingen Metro Detroit Pacorini New Orleans
Queue development and projected decay1 Cancellation represents the key driver of queues. Data for primary aluminium as of 31-Jul-15
Key: Consultation announcement 1-Jul-13 Decision announcement 7-Nov-13 Initial Court Judgment 27-Mar-14 Court of Appeal Judgment 7-Oct-14 Supreme Court decision 17-Dec-14
“Incumbent” queues – development driven almost exclusively by warrant cancellation, given flat load-in by
operators
“Aspirant” queues now appear to have fallen away
1Projected queue decay. For important information as to
modelling approach and assumptions, please see Notices
15/071 : A070 : W024 and 15/191 : A187 : W063.
Projected data based on mid case scenario.
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5%
10%
15%
20%
25%
Pre
miu
m %
age o
f LM
E p
rice +
pre
miu
m
Alum. Percentage US Midwest premium
50
100
150
200
250
300
350
400
450
500
550
US
$ / tonne
Alum. CIF Japan 99.7% Prem 3Mth Aluminium Min 99.7% Europe US$/MT
Alum. US Midwest P1020 Prem Ind
Development of market premiums Significant fall in premiums over 2015
• Early January 2014 spike in North American premiums moderated but then continued to climb
• February and H1 2015 saw a sharp fall in premiums which continued until prices stabilised in
July/August
• Various explanations have been provided, included a shift in supply / demand fundamentals (including
increased exports from China), impact of LME warehouse reform including greater outflow from LME
warehouses, a contraction of the LME forward curve and expected increase in interest rates
Premium development
Data as of 27-Aug-15
Key: Consultation announcement 1-Jul-13 Decision announcement 7-Nov-13 Initial Court Judgment 27-Mar-14 Court of Appeal Judgment 7-Oct-14 Supreme Court decision 17-Dec-14
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Composition of premiums
PREMIUMS
Queue related
LME implementing warehouse reforms
• Queues will fall over time – might go up
first, but eventually will go down
• Queue-based premiums will fall
accordingly
Non-queue related
Outside current scope of LME prices
• Driven by market supply / demand factors
– Location
– Shape, brand, quality
– FoT charge
• Region
• FoT charge
• Queue length
LME traded Premium contracts Premium futures contracts may additionally help to manage queue-based premiums while these continue to exist
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LME’s commitment to progress Development across the LME landscape
Commitment to best-in-class infrastructure
New products
Liquidity Roadmap
New services
• LMEbullion • Warrants as collateral* • Compression* • Warehouse receipts
• LMEselect 7.4 • Warehouse reforms
• Aluminium premiums** • Ferrous suite**
* Subject to regulatory approval ** Subject to consultation and regulatory approval
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LME’s new aluminium contract suite LME’s leading global aluminium contract will be supplemented with four regional premium contracts
GLOBAL
LME ALUMINIUM
US
PREMIUM
EUROPEAN
PREMIUM
SOUTH
EAST
ASIAN
PREMIUM
EAST ASIAN
PREMIUM
LME’s new aluminium contract suite Premium contracts
Comprehensive warehouse reforms
Four regional contracts covering the key
centres of aluminium demand
1
Hedging of regional all-in price of
aluminium
2
Physical delivery of readily available metal
in Premium Warehouses
3
Launch 23 November 2015
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NOTE: subject to regulatory approval
and rule change consultation
Monthly contract to concentrate liquidity
4
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LME premium contract construction – illustrative Premium contract trading without diluting liquidity from the regular LME market
Note: LME premium contract indicatively assumed to trade at current surveyed US Midwest Premium level. Data as of 30 July 2015
Seller
B LME Warrant
$1,608
Current LME Aluminium Contract
$1,608 $185
LME Regional Premium Warrant
With LME Premium Contract
1 2
Buyer
A
$1,793
LME standard contract
LME premium contract
• Not in a queue • In relevant region
(e.g. Baltimore for North America)
• May be queued (e.g.Detroit / Vlissingen)
LME standard contract
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Premium warehouse locations
LME premium warehouse locations in the US
Baltimore
Chicago
Los Angeles
Mobile
St Louis
Toledo
New Orleans
Detroit
Note: LME US Aluminium Premium Futures Contract covers the Midwest, Northeast and South US regions
Location without queues
Location with queues
Owensboro
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LME premium warehouse locations in Europe
Genoa Italy
Hamburg Germany
Helsingborg Sweden
Bilbao Spain
Antwerp Belgium
Barcelona Spain
Hull UK
Leghorn Italy
Liverpool UK
Rotterdam Netherlands
Trieste Italy
Tyne & Wear UK
Vlissingen Netherlands
Note: LME Western European Aluminium Premium Futures Contract covers Western Europe as defined by the UN Geoscheme M49 classification
Location without queues
Location with queues
Moerdijk Netherlands
Bremen Germany
Premium warehouse locations
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LME premium warehouse locations in Asia
Johor Malaysia
Kaohsiung Taiwan
Port Klang Malaysia Singapore
Singapore
Gwangyang Korea
Incheon Korea
Busan Korea
Location without queues
Location with queues
Note: LME Eastern Asia Aluminium Premium Futures Contract covers Eastern Asia, and the LME South-Eastern Asia Aluminium Premium Futures Contract covers South-Eastern Asia, both as defined by the UN Geoscheme M49 classification
Nagoya Japan
Yokohama Japan
Premium warehouse locations
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Disclaimer
© The London Metal Exchange (the “LME”), 2015. The London Metal Exchange logo is a registered trademark of The London Metal
Exchange.
All rights reserved. All information contained within this document (the “Information”) is provided for reference purposes only. While
the LME endeavours to ensure the accuracy, reliability and completeness of the Information, neither the LME, nor any of its affiliates
makes any warranty or representation, express or implied, or accepts any responsibility or liability for, the accuracy, completeness,
reliability or suitability of the Information for any particular purpose. The LME accepts no liability whatsoever to any person for any loss
or damage arising from any inaccuracy or omission in the Information or from any consequence, decision, action or non-action based
on or in reliance upon the Information. All proposed products described in this document are subject to contract, which may or may
not be entered into, and regulatory approval, which may or may not be given. Some proposals may also be subject to consultation and
therefore may or may not be implemented or may be implemented in a modified form. Following the conclusion of a consultation,
regulatory approval may or may not be given to any proposal put forward. The terms of these proposed products, should they be
launched, may differ from the terms described in this document.
Distribution, redistribution, reproduction, modification or transmission of the Information in whole or in part, in any form or by any
means are strictly prohibited without the prior written permission of the LME.
The Information does not, and is not intended to, constitute investment advice, commentary or a recommendation to make any
investment decision. The LME is not acting for any person to whom it has provided the Information. Persons receiving the
Information are not clients of the LME and accordingly the LME is not responsible for providing any such persons with regulatory or
other protections. All persons in receipt of the Information should obtain independent investment, legal, tax and other relevant advice
before making any decisions based on the Information.
LME contracts may only be offered or sold to United States foreign futures and options customers by firms registered with the
Commodity Futures Trading Commission (CFTC), or firms who are permitted to solicit and accept money from US futures and options
customers for trading on the LME pursuant to CFTC rule 30.10.
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