here.

LME presentation for ALFED
Oscar Wehtje, Head of Product Development
September 2015
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
1
Introduction to the LME
2
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
3
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
2015
Cobalt &
Molybdenum
Aluminium
Premiums &
Ferrous suite
4
LME Volumes
• 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
LME trading volume, 2002 – 2014
5
Primary services of the LME
1
2
Pricing
3
Hedging
Delivery
Terminal
Market
Price
Convergence
6
Hedging concepts
7
Exchange – LME pricing
LME prices reflect the material activities of the market
Robust
Regulated
Supply &
demand
LME prices
Trusted
Daily
Transparent
8
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
9
The metals value chain
It does not matter what stage of the metals value chain you are – the LME price is
relevant!
LME price
minus discount
Mining
Concentration
Low Metal
Content
LME price
minus discount
LME price
LME price
plus production
costs and profit
margin
Smelting
Semi
Fabricated
Products
Metal Products
Cathode
Billet
Ingot
Wire
Rebar
Cans
10
How to use an LME price
Metal consumers and producers use the LME price as the reference basis for
physical transactions
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
11
What stops you hedging?
Speculation
Complicated
Pressure off
sourcing
Liquidity
Shareholder
exposure
Cost
Pricing not
hedging
Creating
hedging
team
12
What is hedging?
Establishing a position in a commodity futures market (LME) which is equal and
opposite to a risk on a physical market
• 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
13
Warehouse reforms
and pricing impact
14
Stock levels demonstrate LME market relevance
9.00
8.00
7.00
6.00
Million tonnes
5.00
4.00
3.00
2.00
1.00
0.00
North America
Europe
Asia
Other
LME closing stock (23-Apr-92 – 31-Jul-15)
15
LME warehouse reforms
Already delivered
12 item reform package announced in 2013
LILO Rule
Best-practice information barrier policy
Enhanced LME investigation and action powers
Commitments
of Traders
transparency
for artificial
queues
Enhanced LME investigation and action powers
for artificial queues
Publication of queues and stock data by
Separate load-out rate for steel
warehouse
Creation of Physical Market Committee
plus ongoing six-monthly reviews
Separate load-out rate for steel
Premium contracts (rule changes to facilitate
premium hedging solutions)
Legal review of the LME Warehouse Agreement
Logistical review
In progress
Separate load-out rate for aluminium alloys
Cap rents in queues
Assess structural solutions to high charges
Further load-out rate increase
16
Queue development and projected decay1
Cancellation represents the key driver of queues. Data for primary aluminium as of 31-Jul-15
“Incumbent” queues – development driven almost
exclusively by warrant cancellation, given flat load-in by
operators
800
Waiting time (calendar days)
700
600
500
400
300
200
100
0
Impala Antwerp
Pacorini Johor
Pacorini Vlissingen
Metro Detroit
Pacorini New Orleans
“Aspirant” queues now appear
to have fallen away
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
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.
17
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
25%
Premium %age of LME price + premium
550
500
450
US$ / tonne
400
350
300
250
200
150
100
50
20%
15%
10%
5%
Alum. CIF Japan 99.7% Prem 3Mth
Aluminium Min 99.7% Europe US$/MT
Alum. Percentage US Midwest premium
Alum. US Midwest P1020 Prem Ind
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
Data as of 27-Aug-15
18
Composition of premiums
PREMIUMS
Queue related
Non-queue
related
LME implementing warehouse reforms
Outside current scope of LME prices
•
Queues will fall over time – might go up
first, but eventually will go down
•
Queue-based premiums will fall
accordingly
Premium futures contracts may
additionally help to manage queuebased premiums while these continue
to exist
•
Driven by market supply / demand factors
– Location
– Shape, brand, quality
– FoT charge
LME traded Premium contracts
•
•
•
Region
FoT charge
Queue length
19
LME Product pipeline
20
LME’s commitment to progress
Development across the LME landscape
Commitment to
best-in-class
infrastructure
•
•
•
•
LMEbullion
Warrants as collateral*
Compression*
Warehouse receipts
New services
• LMEselect 7.4
• Warehouse reforms
New products
• Aluminium
premiums**
• Ferrous suite**
Liquidity
Roadmap
*
**
Subject to regulatory approval
Subject to consultation and
regulatory approval
21
LME’s new aluminium contract suite
LME’s leading global aluminium contract will be supplemented with four regional premium contracts
LME’s new aluminium contract suite
Premium contracts
1
US
PREMIUM
EUROPEAN
PREMIUM
SOUTH
EAST
ASIAN
PREMIUM
Four regional contracts covering the key
centres of aluminium demand
EAST ASIAN
PREMIUM
2
Hedging of regional all-in price of
aluminium
GLOBAL
LME ALUMINIUM
3
Physical delivery of readily available metal
in Premium Warehouses
4
Monthly contract to concentrate liquidity
5
Comprehensive warehouse reforms
NOTE: subject to regulatory approval
and rule change consultation
Launch 23 November 2015
22
LME premium contract construction – illustrative
Premium contract trading without diluting liquidity from the regular LME market
1
2
Current LME
Aluminium Contract
A
Buyer
LME standard
contract
With LME
Premium Contract
LME standard
contract
LME premium
contract
$1,608
$185
$1,608
$1,793
B
LME Warrant
Seller
• May be queued
(e.g.Detroit /
Vlissingen)
LME Regional
Premium Warrant
• Not in a queue
• In relevant region
(e.g. Baltimore for
North America)
Note: LME premium contract indicatively assumed to trade at current surveyed US Midwest Premium level. Data as of 30 July 2015
23
LME premium warehouse locations in the US
Premium warehouse locations
St Louis
Chicago
Toledo
Detroit
Baltimore
Owensboro
Los Angeles
Mobile
Location without queues
New Orleans
Location with queues
Note: LME US Aluminium Premium Futures Contract covers the Midwest, Northeast and South US regions
24
LME premium warehouse locations in Europe
Helsingborg
Sweden
Premium warehouse locations
Moerdijk
Netherlands
Tyne & Wear
UK
Rotterdam
Netherlands
Liverpool
UK
Location without queues
Hamburg
Germany
Antwerp
Belgium
Hull
UK
Bilbao
Spain
Bremen
Germany
Genoa
Italy
Vlissingen
Netherlands
Trieste
Italy
Barcelona
Spain
Leghorn
Italy
Location with queues
Note: LME Western European Aluminium Premium Futures Contract covers Western Europe as defined by the
UN Geoscheme M49 classification
25
LME premium warehouse locations in Asia
Premium warehouse locations
Gwangyang
Korea
Incheon
Korea
Busan
Korea
Nagoya
Japan
Yokohama
Japan
Kaohsiung
Taiwan
Johor
Malaysia
Location without queues
Port Klang
Malaysia
Singapore
Singapore
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
26
Questions
27
Ring tour
28
Disclaimer
© The London Metal Exchange (the “LME”), 2015. The London Metal Exchange logo is a registered trademark of The London Metal
Exchange.
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makes any warranty or representation, express or implied, or accepts any responsibility or liability for, the accuracy, completeness,
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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
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The Information does not, and is not intended to, constitute investment advice, commentary or a recommendation to make any
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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
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customers for trading on the LME pursuant to CFTC rule 30.10.
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