London Metal Exchange – What is it, definition and concept | 2022

The London Metal Exchange is one of the most important reference points when defining the prices of any non-ferrous metal worldwide.

Indeed, the London Metal Exchange is known internationally by the acronym (LME) London Metal Exchange. This bag is characterized by being oriented towards the industrial sector market. Since, it is used as a guide to observe the behavior of supply and demand within the non-ferrous metals sector.

Undoubtedly, the prices that are made official within this exchange are used as the basis for carrying out any type of transaction in the world market for non-ferrous metals. For this reason, all those who are dedicated to this industry, when making any type of decision, do so depending on the information they have from the London Metal Exchange.

It is important to mention that this exchange is established in the city of London, England. It is considered as the center of world trade in non-ferrous industrial metals. Approximately three-quarters of all futures trading in these metals is handled through the London Metal Exchange.

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How did the London Metal Exchange originate?

According to the historical data that we have, it is believed that the origin of the London metal exchange was in the year 1571. When they began to carry out commercial transactions of metals based on certain rules and regulations. This occurred during the reign of Elizabeth I.

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Naturally, it was in this physical location that metal dealers regularly met. Of course, at first the transactions were solely for the domestic market in England. But, after the process of the Industrial Revolution, approximately in the year 1877 the London Metal Market and Exchange Company was formed.

Since, the consumption of metals in England increased considerably. Which forced to import a large amount of metals from other countries.

Of course, these metals came from different points and, sometimes, very far away. This caused some additional problems. Like the security conditions of the merchandise and the great diversity of prices, from purchase to delivery.

For this reason, the need arose to create a systematized process to formalize contracts between those interested in doing business. From that moment on, the London Metal Exchange allowed for futures market contracts and other business options.

What metals are traded on the London Metal Exchange?

The metals that are quoted are the following:

  • Copper.
  • Aluminum.
  • Lead.
  • Nickel.
  • Tin.
  • Zinc.
  • Prayed.
  • Silver.

What is important to know about the London Metal Exchange?

Some interesting points that we should know are:

1. Contracts are standardized

Above all, we must know that options and futures contracts are fully standardized. This in relation to size and dates. Regarding the size, it is negotiated through lots that range between 1 to 65 metric tons of weight. Of course, the size of the lot is different according to the metal being traded.

On the other hand, the expiration dates can be chosen between monthly, weekly or daily expiration periods.

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2. Some participants take risks and others seek to hedge against the risk

We have to understand that in the stock market some participants try to cover themselves from the risk and others assume it. The so-called hedgers want the contract they sign to ensure the agreed prices of metals. Meanwhile, traders speculate on the price. What they are looking for is to make a profit from the price change.

London Metal Exchange 1
London Metal Exchange
What is important to know about the London Metal Exchange?

Functions of the London Metal Exchange

The main functions it performs are:

1. Coverage

First of all, the bag performs the hedging function. This means that it executes the risk management process regarding the price of metals. Indeed, businesses and companies protect themselves from the mobility that prices may suffer. This helps them maintain the agreed profit margin and protect their inventory level.

2. Quote

Second, the stock market quotes the price of metals. Therefore, the London Metal Exchange provides the reference prices in the world metal market. These prices are published and are used by companies around the world to make their sales contracts within the industrial sector.

3. Physical delivery of the merchandise

Third, physical deliveries of merchandise are handled through the exchange. That is, the London Metal Exchange approves and grants licenses to brands and metal warehouses that are located in different parts of the world. In this way, companies can deliver metal reserves when there is excess supply and take it out when extreme shortages occur.

London Metal Exchange 2
London Metal Exchange
Functions

In conclusion, it can be said that the London Metal Exchange is the largest in the world. It allows to trade, store, regulate and standardize transactions in the world metal market. It helps to agree business options and futures contracts in the metals market.

To do this, the (LMEX) London Metal Exchange Index is used, which is the index that reflects the prices of metals that are traded on the stock market. The operation of the exchange helps all participants to benefit. Although, the participants of the stock market act with different purposes, some do it to minimize risks and others to take risks.

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