Meaning
Global center for the trading of industrial metals such as aluminum and copper. The london metal exchange establishes the daily closing prices used by producers and fabricators worldwide. It operates a network of approved warehouses to facilitate physical settlement.
Most commercial contracts for base metals refer to these prices as the definitive value.
Pricing Discovery
Trading occurs through electronic platforms and a traditional open outcry floor. The london metal exchange publishes prices that reflect the immediate balance of supply and demand.
Physical Settlement
Buyers who hold a contract until expiry have the right to receive physical metal from a registered location. The london metal exchange maintains strict quality standards for the brands of metal allowed in its system. This link to physical stocks prevents the paper price from deviating too far from reality.
Warehouse stocks are monitored closely as an indicator of global industrial activity.
Hedging Tool
Manufacturers use the exchange to lock in the cost of raw materials for future production runs. By taking an opposing position on the london metal exchange, a firm can offset the risk of price spikes. This stability allows for fixed price sales to end customers.
Financial institutions also use the market to manage the risk of their commodity portfolios.
