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The LME marketplace is fundamentally a financial market for the purpose of hedging and pricing. To ensure that the pricing is consistent with pricing in the industry there is a delivery mechanism to enable physical delivery of product to take place and keep the financial market in line with the physical market. The LME selects certain benchmark commodity grades which are reflective of price movements for that product grouping. It is generally the grade which is most widely produced and most widely consumed globally and/or regionally. However, this does not mean that all industrial users use the LME specification product and in fact many will use product with a different melt flow rate or they may require additives etc.
Providing there is a high correlation between the price of the LME specified grade(s) and the underlying specification of the product/grade that is being hedged then an organization can use the LME for hedging and for pricing. However, in terms of physical delivery in times of excess supply or demand the user would need to swap the grade that they have for the LME specified brand before the could deliver into the LME marketpleace and on receiving product from the LME marketplace they would need to swap the product they receive for product that they can use. This can be pre-arranged with an LME member firm or can be arranged with a physical trader or distributor.
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