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Ask the expert
The commodities trader's no.1 resource
Peter McGuire, Commodity Warrants Australia
Why do traders regularly check the London Metal Exchange (www.lme.co.uk)? What sort of information should a commodities trader check on this site?
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Today's expert: Peter McGuire, Commodity Warrants Australia
| The London Metals Exchange (LME) has been established for over 130 years and is the world’s foremost non-ferrous metals and plastics market. Traders can obtain accurate price data, forecasts, and analysis about the futures contracts that are offered by the exchange. The LME offers futures and options contracts for aluminium, copper, nickel, tin, zinc and lead plus two regional aluminium alloy contracts. In 2005 the Exchange also launched the world’s first futures contracts for plastics.
For traders of any kind it is important to wade through the volumes of available information and focus on analysing data that is accurate, current and pertinent. The LME provides access to information that fits these criteria by publishing price data extracted as a result of general trading activities, which for many metals drives the global pricing mechanism. To understand why the LME is a primary source of market data, you must first grasp how the exchange operates.
The action occurs on the trading floor known as the ring. This opens in London at 11.40am and each contract trades in turn for a five minute period. Following a ten minute break, a second trading session occurs at which point the settlement and official prices are determined. Once prices have been announced, all contracts trade simultaneously until 3.10pm where the situation reverts to that of the morning ring. After 5.00pm the trading returns to an inter-office basis which continues worldwide until returning to a London focus in early morning.
Returning to the focus of this discussion, metals and plastics traders check the LME site due to its transparent pricing mechanism. Transparency of the market is very high with over 50 specific data sets issued throughout the trading day by more than 50 price vendors across the world. The LME provides a forum for the trading of futures contracts from which daily commodity prices are ‘discovered’ and published by the exchange. From this cumulative price analysis those trading in the raw materials use the LME price movements as the basis to negotiate for the physical sale or purchase of metals and plastics. This also provides those trading raw materials the means to anticipate future market movements, which in turn affects price.
For traders, having access to forecasts and analyses of commodity futures contracts means they can obtain a better understanding of future price drivers which will better inform their investment decisions. Global metals markets are highly volatile and there are myriad news sources and analytical reports all of differing quality and depth. By going to one of the primary sources of outward pricing structures, active traders can access real time and daily price data which means they have the most accurate forward picture of the market. The daily price data takes the form of an announcement of official prices. The trading that determines these prices is highly liquid and market participants are confident that they are reflective of current supply and demand.
In terms of the information traders should be checking on the LME, there are a few areas which are of particular interest. Traders wanting information about a specific commodity should look at the individual commodity hubs, where you can access the official LME price, price history, forward price graphs, production and consumption figures, and ring trading times for futures contracts. Traders can also freely subscribe to a data service distributed through a range of licensed third party market data distributors as well as access real time and historical market data through a secure LME microsite.
In essence, the LME allows traders to better predict future price movements or manage the subsequent risk. Traders regularly check to find out official price data to better inform their investment outlook, which has a flow on effect, impacting relevant financial and physical commodities markets worldwide.
Peter McGuire, Managing Director, Commodity Warrants Australia
Disclaimer:
The information in this article is general in nature and does not take into account any investor's particular objectives, financial situation or needs. In considering its appropriateness, investors should read the relevant product disclosure statement and consult a financial adviser before making an investment decision.
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