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Media Workshop Introduction to The 7 June 2016 MEDIA WORKSHOP INTRODUCTION TO THE LME Trevor Spanner Chief Operating Officer Group Risk Officer Agenda 1 History, Purpose and Workings of the London Metal Exchange 2 LME Contracts and Prompt date structure 3 LME Warehousing and Reform 4 LMEshield 5 LME Liquidity Roadmap 6 Clearing 7 Conclusion 2 Agenda 1 History, Purpose and Workings of the London Metal Exchange 2 LME Contracts and Prompt date structure 3 LME Warehousing and Reform 4 LMEshield 5 LME Liquidity Roadmap 6 Clearing 7 Conclusion 3 London Metal Exchange From 1877 to today The origins of LME goes back even further… 1. Origins in The Royal Exchange, London from 1571 2. The Jerusalem Coffee House, Cornhill, London early 1800 3. The London Metals and Mining Co. 1877 (Initial metals: Copper and Tin) Originate from the need to formalise trading into one market place with: • fixed trading times • standard contracts specifications • source of price ‘discovery’ 4 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 Each year, the exchange reviews its contracts and looks to launch new products to meet the needs of the industry. 5 LME Volumes 2002 - 2015 In 2015, 169.6 million lots, down 4.3% from 2014, $11.9 trillion and 3.8 billion tonnes 6 LME Average Daily Turnover 670,189 lots on average per day in 2015 7 The LME is the leading metal exchange LME Share of exchange metal traded 2015 LME market share 100% 100% 100% 93% 92% 91% 90% 80% 74% 70% 64% 60% 60% 50% 40% 30% 20% 10% 0% AA Al Cu NA Ni Pb Sn Zn 8 Global commodity markets are down Only Tin is up since 2007 whilst lead is flat Losses as much as 72% Nickel and 87% Baltic Dry Index 300 Index 2007=100 250 200 Tin +58% 150 Lead +2% 100 Cu -18% Oil -25% 50 Al -44% Zinc -55% Nickel -73% 0 Baltic -87% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Copper 3 Month ($/mt) Nickel 3 Month ($/mt) Oil ($/bbl) Zinc ($/mt) Aluminium 3 Month ($/mt) Baltic Dry Index Lead 3 Month ($/mt) Tin 3 Month ($/mt) Data as of 14 April 2016 Source: LME, Bloomberg 9 Primary services of the LME 1 2 3 Pricing Hedging Delivery Terminal Market Price Convergence 10 A diverse marketplace Smelters Consumers Recyclers Mining Merchants Cable, tube, and Recycling companies Smelter and Mining Companies Trading Houses automotive Scrap trading Refinery Companies companies companies Protect margins Protect against Protect value of Protect value of Protect value of during smelting increasing material mining assets physical stocks metal content process costs Orders Liquidity Market Brokers Banks Investors Makers 11 Hedger vs. Financial Player A Hedger starts with a price exposure, buys or sells futures contracts, and therefore offsets the price exposure. A Financial Player starts without price exposure, buys or sells futures contracts, and takes on price exposure 12 The physical and paper market Producer Consumer Physical Transaction “Paper” Transaction “Paper” Transaction Client Broker Broker Client Client Broker Broker Client Broker Client 13 The Ring: global reference price The home of global metals markets since 1877 2016 1800s 2000s 1950s 1970s 14 The LME today Three venues providing execution choice Ring Inter-office Select ~100 members, 43,000 customers 15 LME traded and cleared currencies LME contracts trade in US Dollars LME contracts can also be cleared in the following currencies: • Euro • GB Sterling • Japanese Yen • And in RMB when it becomes a freely tradable currency 16 Agenda 1 History, Purpose and Workings of the London Metal Exchange 2 LME Contracts and Prompt date structure 3 LME Warehousing and Reform 4 LMEshield 5 LME Liquidity Roadmap 6 Clearing 7 Conclusion 17 The LME contract Multiple benefits to using LME contracts Clearing house guarantee Multiple Broker Execution • Cleared contract holders are • Ability to execute through and guaranteed financial hold positons with multiple settlement by LME Clear in brokers the event of a counterparty • Wide range of competitive default LME brokers Contract Transparent, reliable pricing Deepest liquidity • Fully transparent electronic • All market interest comes market together to form best market • Ability to participate in prices setting Official and Closing Prices 18 LME prompt date structure The LME’s prompt date structure runs daily for the first 3 months, then weekly until the end of the 6th month and then monthly out to 123 months, for Copper and Aluminium Illustration of the three phases of the LME’s prompt date structure 1. Daily 2. Weekly 3. Monthly Tomorrow 3M 6M 123M Daily prompt dates: Weekly prompt dates: Monthly prompt dates: Cash to 3 Months Wednesdays , 3 months to 6 months 3rd Wednesday, 7 months to 123 months 3rd Wednesday (monthly) prompt dates are available in all months Trading horizon for other metals: Lead, Nickel and Zinc out to 63 months, Aluminium Alloy and NASAAC out to 27 months, Tin, Steel Billet, Cobalt and Molybdenum out to 15 months 19 Rolling prompt dates Tom Tomorrow’s date Cash Two business days from today (sometimes called ‘Spot’) 3 months 3 calendar months from today Two day settlement Contracts are closed two days prior to the prompt date and settled on the prompt date 20 LME and OTC markets OTC LME Customisation Standardisation Credit Credit Opacity Transparency Counterparty risk Clearing Protection 21 Introducing Flex… Increased product flexibility with the benefits of exchange trading & clearing OTC type transactions OTC LME Extended Customisation date structure Standardisation Credit FLEX Transparency Opacity Clearing Protection Clearing Protection Counterparty risk Cost efficiency Credit Transparency Credit 22 Agenda 1 History, Purpose and Workings of the London Metal Exchange 2 LME Contracts and Prompt date structure 3 LME Warehousing and Reform 4 LMEshield 5 LME Liquidity Roadmap 6 Clearing 7 Conclusion 23 Warehouse Locations Over 650 warehouses approved by the LME - 14 countries, 35 locations & LME Shield with MOU to develop along Belt and Road routes 1. Antwerp, Belgium 10.Vlissingen, Netherlands Silk Road Economic Belt 2. Bremen, Germany 11.Barcelona, Spain Maritime Silk Road 3. Hamburg, Germany 12.Bilbao, Spain 4. Genoa, Italy 13.Helsingborg, Sweden 5. Leghorn, Italy 14.Hull, UK 6. Ravenna, Italy 15.Liverpool, UK 7. Trieste, Italy 1. Busan, South Korea 8. Moerdijk, Netherlands 2. Gwangyang, South Korea 9. Rotterdam, Netherlands 3. Incheon, South Korea 1. Nagoya, Japan 1. Baltimore, Maryland 2. Yokohama, Japan 2. Chicago, Illinois 3. Detroit, Michigan 4. Los Angeles, California 5. Mobile, Alabama 1. Kaohsiung, Taiwan 6. New Orleans, Louisiana 7. Owensboro, Kentucky 8. Panama City, Florida 9. St. Louis, Missouri 10.Toledo, Ohio 1. Dubai, UAE 1. Johor, Malaysia 2. Singapore 3. Port Klang, Malaysia 24 LME delivery: why? Helps price convergence Price convergence between instills credibility in futures/physical the LME price Why the need for possibility of delivery LME delivery is not designed to replace Serves industry in times Physical market supply mechanism of over/under supply but to counteract irrational price signals 25 LME role in storage LME does NOT LME does NOT buy or sell own storage facilities physical material LME APPROVES locations and storage facilities LME does NOT LME does NOT own transportation set rates for rents operations and handling 26 In 2015,2.23 were milliontonnes deliveredin and 3.77million were tonnes deliveredout LME Warehouses Warehouses LME 1,000,000 (600,000) (400,000) (200,000) Tonnes 200,000 400,000 600,000 800,000 0 Jan 2009 Mar 2009 May 2009 Jul 2009 Sep 2009 Nov 2009 Jan 2010 Mar 2010 May 2010 Jul 2010 Sep 2010 Nov 2010 Jan 2011 - Delivered In Delivered Mar 2011 Deliveries May 2011 Jul 2011 Sep 2011 Nov 2011 Jan 2012 Delivered Out. Delivered Mar 2012 May 2012 Jul 2012 Sep 2012 Nov 2012 Jan 2013 Mar 2013 May 2013 Jul 2013 Sep 2013 Nov 2013 Jan 2014 Mar 2014 May 2014 Jul 2014 Sep 2014 Nov 2014 Jan 2015 Mar 2015 May 2015 Jul 2015 Sep 2015 Nov 2015 27 LME location approval process Net consumption area Safe and or gateway well managed Location approval Logistically sound Politically conduit for the passage economically of material fiscally stable 28 Warehouse companies approval Warehouse company: Warehouse: well established and structure and security experienced in handling of the building must relevant material be suitable Listed warehouses Facilities: access to necessary Good access to road, rail equipment checked for and water where required satisfactory operations 29 LME warehouse reform programme Reaching the conclusion of the delivery pathway LILO Rule Best-practice information barrier policy Enhanced LME investigation and action powers Commitments of Traders transparency for artificial queues Publication of queues and stock data by Creation of Physical Market Committee warehouse plus ongoing six-monthly reviews Premium contracts (rule changes to facilitate Separate load-out rate for steel premium hedging solutions) Already delivered Already Legal review of the LME Warehouse Agreement Logistical review Further load-out rate increase Separate load-out rate for aluminium alloys 16 - Cap rents in queues Due May - 1 16 - Assess structural solutions to high charges Apr Paper Paper - 6 released released Discussion Discussion 30 Queue reduction following reform… Copper queues now believed to be entirely operational, whilst aluminium queues are steadily decreasing 900
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