Price convergence is another very important feature of the LME and its operations. The LME licences warehouses to provide a market of last resort and to ensure the LME price stays in line with the physical/spot price.
The underlying threat of the delivery of physical material - made possible by the network of LME-approved warehouses - is what keeps the LME price in line with the physical price.
In the unlikely event of the LME price straying higher than the spot price, traders can arbitrage the difference by buying physical spot metal and selling it on the LME, then delivering it into LME-approved warehouses. If the LME price falls lower than the spot the opposite takes place.
This price convergence, coupled with unprecedented global volumes, means the prices discovered on the LME’s markets are used across the world as reference prices in all sectors of the metals value chain.