This LME Insight piece considers the benefits of platform-based price discovery, which is at the heart of the collaboration between the London Metal Exchange (LME) and Metalshub.

Commodities are the lifeblood of economic activity: there is no air travel without oil, no bread without wheat and virtually none of our modern electronic devices would work without copper. As a result, fair and transparent commodity prices are extremely important, and often drive shifts in supply and demand as well as key investment decisions. In the mining sector for example, they underpin decisions to build, expand or close production assets. 

The ways in which commodity prices are discovered can be extremely important. This crucial topic gets little attention relative to the importance it takes in economic decisions. The EU critical Raw Materials Act specifically mentions inefficient price discovery as an issue.
In a recent LME Insight piece we took an in-depth look depth at the different price discovery methods used in commodity markets, and these are briefly summarised below: 

metalshub market maturity

Each price discovery method has advantages and drawbacks, but there are a number of challenges that can affect any market: 

  • Low spot traded volumes – to ensure certainty of supply, many buyers will secure most of their metal requirements under long-term contracts. This can lead to low spot volumes in some markets, which in turn leads to limited availability of spot price data. In this context, spot volumes often primarily represent short-term requirements as a result, for example,. of an unexpected increase in production, and so are less easy to predict. 
  • Lack of engagement with price discovery – all price assessment methodologies rely on reported or recorded trades. If market participants avoid either reporting or recording of transactions, this can further accentuate the lack of price data and participation.
  • Reliance on market indications – low spot volumes typically lead to a limited number of data points. Market conventions, such as a large minimum spot transaction size, can result in a low number of shipments, thus compounding this issue. In the absence of readily available trade data points, price discovery may become reliant on “indications of interest”, such as bids and offers for a given parcel size. Some parties question the use of these indications of interest because no transaction has taken place at the indicative price level. For that reason, the indication may not reflect the true market price for completing a trade. Another challenge is the allegation that indications of interest can be used to unduly influence price discovery and index prices. 

The above elements may lead to concerns among market users about the way in which spot prices, and resultant index prices, have been discovered. This can result in a lack of willingness to reference those prices in physical contracts potentially making the process more resource intensive. Parties would likely need to negotiate their fixed contracts more frequently (eg once a month) Rather than negotiating long-term, index-linked contracts.  

Developing a robust alternative

The LME recognises that certain physical markets can be highly illiquid, non-standardised and geographically distinct. As such creating a single representative price for those commodities is highly challenging and must be driven by market participants themselves to ensure any price is representative of, and can be used by, the market as a whole.
Transparency in the assessment process is crucial to developing a trusted and robust price. The LME recognises the commercial sensitivity of trade data to market participants and that any solution needs to respect confidentiality. 

The LME believes that price discovery underpinned by real transaction data, such as how prices are discovered on the LME, is the optimal way to assess fair market value. However, not all markets can support price discovery based on physically settled exchange traded futures. 
For these markets, platform-based price discovery presents a viable solution.

Benefits of platform-based price discovery

  • Real transaction data – a platform-based index (or “transaction-based index” as it is also known) is based entirely on completed trades and binding bids and offers entered on the platform and thereby provide a credible assessment of fair market value. 
  • Data store – data entered on the platform is recorded and creates a log of price history, enabling a full audit trail and historical analysis.
  • Transparent and robust calculation methodology – a clear algorithmic methodology provides the structure for calculation of the index. This methodology is publicly available for scrutiny, while the data points are anonymised. Several transactional data points are considered during a trading period to create one index point. This process ensures a robust result with all data captured, reported and assessed in a consistent, timely and compliant fashion.
  • Data-driven normalisation – normalisation values are derived from traded data points and are based on a public methodology defined jointly with the industry in a pricing committee.
  • Confidentiality – trades captured on the platform are anonymised. Thus, individual trades cannot be traced back from the price index and confidential commercial data is protected.

The concept of transaction-based price discovery can work in any market – provided there is industry support. To assess the feasibility of introducing such a price-discovery method, market participants’ support is required. Furthermore, enough participants representing a sufficient proportion of that market’s spot volumes are needed to transact on the platform to ensure the discovered prices are representative and relevant.

Advantages of transacting on a platform are not limited to price discovery. In physical-metals trading, documents relating to conflict minerals regulation, ESG certifications like IRMA and Nickel Mark, carbon footprint data and recycled content need to be exchanged and reviewed at the time of transaction. Digital tools, such as Metalshub help companies get ahead of the curve in meeting legal and regulatory demands. This frees up resources to focus on the core business of adding value to customers. 

LME and Metalshub collaboration

The LME and Metalshub entered into a collaboration in October 2021 with the ambition of bringing digital tools and the benefits of platform-based price discovery to the increasingly complex world of metals trading. 

Raw materials worth between US$6-8 billion are traded every year on Metalshub. Basis that trading activity, the platform already successfully discovers a number of prices for ferroalloys and metals, including a nickel briquette premium index. 

Bringing the benefits of platform-based price discovery to the market

The nickel briquette premium index is a great example of the extensive work the LME and Metalshub carried out with the market on qualifying different grades of nickel.
There is tangible interest from corporates to use Metalshub as a platform for the discovery of green price premiums too. The LME is in active discussions on how to facilitate this and envisages full integration of Metalshub with LMEpassport, the LME’s digital registry for COAs and sustainability credentials. 

Get in touch

The LME and Metalshub stand ready to engage with market participants to add new products on the platform where there is market appetite. 
If you are frustrated with price discovery in your particular market and would like to see more transparent, reliable and fair pricing, please get in touch via email.

About Metalshub

Metalshub is the leading supply chain solution platform for the metals & mining industry. It provides price intelligence and indices based on platform-executed transactions.
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