 As a market of “last resort”, industry can use the LME’s delivery option to sell excess stock in times of over supply and as a source of material in times of extreme shortage. To support this mechanism the Exchange approves and licenses a network of warehouses around the world.
LME approved delivery locations are typically located in areas of high consumption or a natural trading hub for the shipment of material. Warehouse companies themselves must also meet strict criteria before they are approved for the handling of metals and plastics. The LME’s daily stock reports play a major part in the assessment of prices quoted by market makers.
In reality, physical delivery occurs in a very small percentage of cases on the LME, less than 1% for its base metal contracts, as most organisations use the Exchange for hedging purposes. However, the small percentage which does result in delivery plays a vital role in creating price convergence. As a delivery date falls due, the LME price will naturally converge with the ‘spot’ or physical price. If there is a discrepancy, some parties will see a favourable opportunity and buy or sell material via the LME system. This has the result of constantly ensuring the LME price is line with the physical market price.
Click here to view the conclusions and recommendations of an independent study investigating the implications of changing standard LME contract terms for metal delivery from an "in warehouse" basis to a "free on truck" (FOT) basis. |
