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Delivery against LME contracts is in the form of warrants, which are bearer documents of title enabling the holder to take possession of a specified parcel of metal at a specified LME approved warehouse. Each LME warrant is for one lot of metal, the tonnage of which is dependent on the contract specification. The front of the LME warrant displays information about the parcel of metal, including its brand, the exact tonnage, the shape and the location.
Warrants are issued by the warehouse companies at the request of the owner of the metal once it is properly stored in an LME-approved warehouse and the warehouse company has ensured conformity with the LME’s Special Contract Rules for that metal. These rules include, but are not limited to, the technical specification of the metal, its shape, weight and bundling. The metal must also be of a brand that is approved and listed by the LME.
The LME is very proud of its global role in providing a pricing mechanism that reflects the state of the markets it serves. An essential factor in achieving this aim is for the LME to maintain a spread of approved warehouse locations that reflects the needs of the users of the market and for the LME to monitor those approved locations for continued compliance with the listing criteria. Such criteria include the need for locations to be in areas of net consumption or to be ‘gateways’ serving those areas of net consumption and also for them to meet the LME’s strict legal, taxation and customs requirements.
The LME is also active in assessing potential new locations as good delivery points. The location criteria are designed to ensure that metal is stored in locations close to where it is needed, rather than areas of production, thus assisting traders and industry in meeting their last resort delivery requirements as readily as possible.
Ultimately, only a relatively small percentage of LME contracts actually result in delivery, as the vast majority of contracts prove to be hedging contracts bought or sold back before falling due for settlement. As a result, the deliveries that do take place, either in or out of warehouse, will reflect the physical market demand and supply, and the information included in the LME’s daily stock reports can play a major part in the market’s assessment of the worlds metals prices.
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