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LME Presentation for ALFED

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LME Presentation for ALFED 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 1920 1978 1979 1992 2002 2008 2010 2015 Copper Lead & Primary Nickel Aluminium NASAAC Steel Billet Cobalt & Aluminium & Tin Zinc Aluminium Alloy Molybdenum 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 3 Pricing Hedging Delivery Terminal Market Price Convergence 6 Hedging concepts 7 Exchange – LME pricing LME prices reflect the material activities of the market Supply & Robust demand Regulated LME prices Daily Trans- Trusted parent 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 LME price LME price plus production LME price minus discount minus discount costs and profit margin Semi Mining Concentration Smelting Fabricated Metal Products Products Cathode Billet Low Metal Content 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? Pressure off Speculation Complicated sourcing Shareholder Liquidity Cost exposure Creating Pricing not hedging 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 5.00 4.00 3.00 Million Million tonnes 2.00 1.00 0.00 North America Europe Asia Other LME closing stock (23-Apr-92 – 31-Jul-15) 15 LME warehouse reforms 12 item reform package announced in 2013 LILO Rule Best-practice information barrier policy Enhanced LME investigation and action powers Enhanced LME investigation and action powers Commitments of Traders transparency for artificial queues for artificial queues Publication of queues and stock data by Creation of Physical Market Committee Separate loadwarehouse-out rate for steel plus ongoing six-monthly reviews Premium contracts (rule changes to facilitate Separate load-out rate for steel Already delivered Already premium hedging solutions) Legal review of the LME Warehouse Agreement Logistical review Separate load-out rate for aluminium alloys Cap rents in queues Assess structural solutions to high charges Further load-out rate increase In progress 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 800 700 600 500 400 300 Waiting time (calendardays) Waitingtime 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 1Projected queue decay. For important information as to Decision announcement 7-Nov-13 Initial Court Judgment 27-Mar-14 modelling approach and assumptions, please see Notices Court of Appeal Judgment 7-Oct-14 15/071 : A070 : W024 and 15/191 : A187 : W063. Supreme Court decision 17-Dec-14 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 550 25% 500 450 20% 400 350 300 15% 250 US$ / tonne / US$ 200 10% 150 100 Premium %age of LME price + premium price LME of %age Premium 50 5% Alum. CIF Japan 99.7% Prem 3Mth Aluminium Min 99.7% Europe US$/MT Alum. US Midwest P1020 Prem Ind Alum. Percentage US Midwest premium 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 Non-queue Queue related related LME implementing warehouse reforms Outside current scope of LME prices • Queues will fall over time – might go up • Driven by market supply / demand factors first, but eventually will go down – Location • Queue-based premiums will fall – Shape, brand, quality accordingly – FoT charge LME traded Premium contracts Premium futures contracts may additionally help to manage queue- based premiums while these continue • Region to exist • FoT charge • Queue length 19 LME Product pipeline 20 LME’s commitment to progress Development across the LME landscape Commitment to • LMEselect 7.4 best-in-class • Warehouse reforms infrastructure • LMEbullion • Aluminium • Warrants as collateral* New services New products premiums** • Compression* • Ferrous suite** • Warehouse receipts 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 SOUTH Four regional contracts covering the key US EUROPEAN EAST EAST ASIAN centres of aluminium demand PREMIUM PREMIUM ASIAN PREMIUM PREMIUM 2 Hedging of regional all-in price of aluminium 3 GLOBAL Physical delivery of readily available metal LME ALUMINIUM in Premium Warehouses 4 Monthly contract to concentrate liquidity 5 Comprehensive warehouse reforms Launch 23 November 2015 NOTE: subject to regulatory approval and rule change consultation 22 LME premium contract construction – illustrative Premium contract trading without diluting liquidity from the regular LME market 1 2 Current LME With LME Aluminium Contract Premium Contract LME standard LME premium LME standard contract contract A contract $1,608 $185 Buyer $1,608 $1,793 LME Regional B LME Warrant Premium Warrant Seller • May be queued • Not in a queue (e.g.Detroit / • In relevant region Vlissingen) (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 Premium warehouse locations Sweden Moerdijk Tyne & Wear Netherlands UK Bremen Germany Rotterdam Hamburg Liverpool Netherlands Germany UK Antwerp Hull Belgium UK Genoa Vlissingen Italy Bilbao Netherlands Trieste Spain Italy Leghorn Location without queues Barcelona Italy Spain 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 Johor Taiwan Malaysia Port Klang Malaysia Singapore Location without queues Singapore Location with queues Note: LME Eastern Asia Aluminium Premium Futures Contract covers Eastern Asia, and the LME South-Eastern Asia Aluminium Premium Futures
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