Since being formally established in 1877 the London Metal Exchange has sought to innovate whilst maintaining its traditional strengths and relationships. A member of HKEX Group, the LME remains close to its core users by ensuring its contracts continue to be relevant to the physical metals industry.
LME origins: pre-1877
International trade in metals could be said to have commenced in Britain when the Romans invaded in AD43 and extracted the large deposits of copper and tin ore in Cornwall and Wales to satisfy their increasing domestic need for the production of bronze and alloys.
However, the origins of the London Metal Exchange can only be traced back as far as the opening of the Royal Exchange in London in 1571 during the reign of Queen Elizabeth I. It was there that traders in metal and a range of other commodities began to meet on a regular basis. At first the traders merely dealt in physical metal for the domestic market but because Britain soon became a major exporter of metals, European merchants began to arrive to join in these activities.
In the early 19th century there were so many commodity traders, ship charterers and financiers using the Royal Exchange that it became impossible to do business. As a result, individual groups of traders set up shop in the nearby city coffee houses. The Jerusalem Coffee House, off Cornhill, became the favourite of the metal trading community and it was there that the tradition of the Ring was born. A merchant with metal to sell would draw a circle in the sawdust on the floor and call out 'Change', at which point all those wishing to trade would assemble around the circle and make their bids and offers.
In the early part of the 19th century the U.K. was self sufficient in copper and tin and quoted prices that remained fixed for long periods. Everything changed with the Industrial Revolution when the UK became the most technologically advanced country in the world, importing large tonnages from abroad.
The metal traders were now faced with a real problem because, having bought ores and concentrates from as far away as Chile and Malaya, they had no way of knowing what the price would be at the time of the ship's arrival some months later. Importing large tonnages from overseas at irregular intervals put merchants and consumers seriously at risk.
Technology came to their aid with the invention of the telegraph. Lines of communication were established between continents and the change from sail to steam ships made arrival dates more predictable. Now merchants were able to anticipate the time of arrival of a cargo of metal and were able to sell it for forward delivery on a fixed date, thus protecting themselves against a fall in price during the voyage.
Three-month delivery of metal
In 1869 the opening of the Suez Canal reduced the delivery time of tin from Malaya to match the three months delivery time for copper from Chile. This gave rise to the LME's unique system of daily prompt dates for up to three months forward, which still exists to this day.
As the trade in metal futures grew to meet the increasing demands of British industry, more and more merchants were participating in trading and it became necessary to find premises where they could convene each day. They first moved to the Lombard Exchange and Newsroom but once again the intrusion of other traders drove them to find new premises.
1877 - LME formed
In 1877 the traders formed the London Metals and Mining Company and moved into their first premises over a hat shop in Lombard Court. Telegraphic links were set up and a company secretary was appointed to handle the administration. Membership increased rapidly and, after surpassing the three hundred mark, the decision was taken to move to a purpose built Exchange in Whittington Avenue, where it remained for 98 years. Then, after a period of 14 years at Plantation House in Fenchurch Street, the Exchange moved in 1994 to Leadenhall Street. In 2016, the LME moved to its current home in Finsbury Square signifying the next step of its modernisation and housing its custom-built clearing house, LME Clear.
The world of metals and base metal trading has changed dramatically over the last century, and the LME has continually adapted to these changes. New metals have been introduced to the Exchange as and when demand dictated.
- Copper and tin have traded on the LME since the Exchange was established.
- The copper contract was upgraded to high grade copper in November 1981 and again to today's Grade-A contract in June 1986.
- Tin's present contract began trading in June 1989, following a brief cessation in 1985 due to the collapse of the International Tin Council.
- Lead and zinc were officially introduced in 1920, but were traded unofficially before that.
- The lead contract has remained virtually unchanged, certainly since its reintroduction in October 1952 following the closure of the Exchange brought about by the Second World War.
- Zinc has undergone a number of upgrades, most recently with the introduction of the special high grade contract in June 1986.
- Primary aluminium was introduced in December 1978 and today's high grade contract began trading in August 1987.
- Nickel commenced trading on the Exchange the year after primary aluminium, in April 1979 and aluminium alloy in October 1992.
An index contract - LMEX - based on the six primary metals traded on the Exchange was introduced in 2000. This base metals index is specifically designed to provide investors access to futures and traded options contracts based on non-ferrous metals without the physical delivery, storage and transaction costs associated with the underlying commodity contracts.
LMEminis - smaller, cash-settled monthly futures contracts and provides a simple way to access the LME's most liquid contracts - were introduced for copper, aluminium and zinc in December 2006.
In 2008, the LME made a move into ferrous metals with the introduction of two regional contracts for steel billet. In July 2010 these contracts merged into a single global contract.
In February 2010 came the launch of two minor metals futures contracts for cobalt and molybdenum.
The most recent contract additions have been the launch of LME Steel Scrap and LME Steel Rebar, which are cash-settled due to demand for these types of contracts from the market.
A new era
The LME was acquired by Hong Kong Exchanges & Clearing Limited in December 2012 and with that custom built a clearing house from scratch, LME Clear, to specifically serve the needs of the metals community.
The LME's approach to launching new products driven by market demand has led to the creation of certain initiatives such as LMEshield - the electronic commodity receipting solution, which facilitates commodity trade finance and helps to improve global standards for commodity storage.
In H1 of 2017, the Exchange is set to launch its suite f gold and silver contracts, collectively known as LMEprecious, which has been developed in partnership with the World Gold Council and a group of leading industry participants to provide greater transparency to the London precious market.