| In order to support the delivery mechanism which underpins all LME plastics contracts, the Exchange approves and licenses a network of warehouses around the world, in LME approved locations across Asia, North America and Europe.
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. The potential for physical delivery also offers the industry an outlet for the sale of material in times of over supply and as an available source of material in times of under supply.
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 plastics.
The Delivery Process
When material arrives into warehouse, the warehouse operator inspects it to ensure it complies with the respective LME contract specification. Once the material passes the inspection, the warehouse instructs its London agent to create a Plastics Warrant through the LME’s electronic SWORD system; a secure electronic transfer system for LME Warrants. Plastics Warrants give the bearer right of possession to a specified lot of material. When material goes to physical delivery, and is effectively removed from the warehouse by the new owner, Plastics Warrants are sent for cancellation.
Approved Brands
As the LME delivery system relies on a user being guaranteed a specified quality of material, wherever they take delivery in the world, the Exchange also approves brands of polypropylene and linear low density polyethylene. Those brands which meet the LME specification become ‘approved’ and can then be delivered against an LME contract.
Unlike non-ferrous metals which can sit in warehouse indefinitely, plastic can degrade over time. To address this issue, the Exchange has imposed a material ‘shelf-life’ which sets a limit to the amount of time plastic can be stored in warehouse from its production date. See the full contract specification for further details. |
