Monday, 18 March 2013

Visit to the London Metal Exchange Monday 18th March

One of my aims this year is for our Company to visit a number of real markets in the City where goods or foodstuffs are traded.
The London Metal Exchange is the world centre for the trading of industrial metals and more than 80% of all non-ferrous metals futures business is transacted on its platforms.  The LME brings together participants from the physical industry of metal consumers and the financial community.  The result is a vital, robust and regulated market where there is always a buyer and a seller, always a price, and always the decision to transfer or take on risk.
The London Metal Market and Exchange Company was founded back in 1877, but the market traces its origins back to 1571 and the opening of the Royal Exchange. Before that business was conducted by traders in London' s coffee houses using a makeshift ring drawn in chalk on the floor.
At first only copper was traded.  Lead and zinc were soon added but only gained official trading status in 1920. The range of metals traded was progressively extended: aluminium (1978), nickel (1979),  tin (1989), aluminium alloy (1992), steel (2008), and minor metals  cobalt and  molybdenum (2010). The exchange ceased trading plastics in 2011. The total value of the trade is today around $US 12 trillion annually.  Indeed the LME trades 40 times world production of non-ferrous metals, it can also arrange to provide physical delivery of metals where required - purchasers of contracts left to reach maturity receiving a warrant for a specific LME approved warehouse to take delivery of the metal.
Many deals are still made for commodities to be delivered in three months' time. The custom stems from the time that copper cargoes originally took in 1877 on their voyage from the ports of Chile.

To trade contracts in copper, tin, or any other metal listed on the LME, you have to trade through an LME member. Open out-cry is the oldest and most popular way of trading on the exchange making a cacophony of noise and periods that appear absolute chaos but are actually very ordered.  The ring is central to the process of price discovery, the way that LME official prices are established. Prices derived from the short ring trading sessions are most representative of industry supply and demand. The official settlement price, on which contracts are settled, is determined by the last offer price before the bell is sounded to mark the end of the official ring.
We were able to see some of the trade, where each of the nine metals are traded in blocks with a five-minute mad-cap session for each contract before moving on to a different metal – all activity culminating into the last seconds of the session and negotiated with hand signals indicating the price being struck. The LME is the last exchange in Europe where open-outcry trading takes place and it was good to hear that the LME conducts training courses for those wanting to join the market.
After an interesting visit we all adjourned for an excellent lunch in a pub in beautiful Leadenhall Market.  Thanks to Michael Lynch for managing this event.
I rounded up the afternoon braving torrential rain with a visit to the Dutch Church in Austin Friars where there was a fascinating display of basket making by the artisans associated with the Worshipful Company of Basketmakers.

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