February 2021In the global metal-trading ecosystem everything starts with the metal producers. Without the contributions of miners and smelters, modern life would look very different. After all, our means of transportation, communication, and energy transmission and storage, to name a few, often rely on metal. For the London Metal Exchange (LME) and its physically delivered non-ferrous contracts, metal producers are very important. The ability to take and make delivery of metal via LME contracts ensures the prices discovered on the LME are in line with the physical market. In order to guarantee quality and specification of delivered metal, the LME reviews, vets and approves individual metal producers to register their production as an LME brand.
In this article we give a high level overview of LME brands and the listing process by answering these three questions:
- What is an LME brand?
- Why is it important for a producer to have their metal listed on the LME as an LME brand?
- How does a producer list their production on the LME as an LME brand?
WHAT IS AN LME BRAND?
The LME maintains a list of producers and their brands which are approved for delivery against LME contracts. At the time of writing there are more than 500 brands listed on the LME from more than 60 countries. The following table gives an overview of brands per metal and the number of countries from which those brands emanate. The full list of LME approved brands is available here.
Metal that is listed as an LME brand needs to comply with the chemical composition requirements of that metal, as well as new responsible sourcing requirements, which will be phased in with full compliance required by 2023.
It is important to note here that only metal which features on the LME brands list can be used in the settlement of the LME’s physical contracts. Furthermore, that metal must also be delivered into one of the LME’s licensed warehouses before an electronic document representing entitlement (known as a “warrant” on the LME) can be issued.
For every LME metal there are specific warranting requirements with different rules for bundling, packaging, shape and weight. They are available in the LME Rulebook under the Special Contract Rules for each metal.
For buyers and sellers it is important to know exactly what constitutes deliverable material. This common base of understanding creates certainty and enables transparency for the whole supply chain, and allows for the creation of a liquid futures market. Buyers who want to take delivery at the LME are assured of a minimum quality/specification of the metal they receive.
Ultimately, LME brands underpin pricing on the LME. The prices discovered on the LME derive their value directly from the deliverable material on warrant. This is especially important for the LME Official Settlement Price which serves as the reference price in commercial transactions around the world.
WHY IS IT IMPORTANT FOR A PRODUCER TO HAVE THEIR METAL LISTED AS AN LME BRAND?
For producers, having their metal production listed as an LME brand has commercial benefits. The first point is recognition for meeting a globally known standard. LME prices, as we have seen, serve as reference prices in many commercial contracts.
Secondly, there are tangible benefits for owners of LME-listed metal who are also clients of LME brand producers. Owners of metal which features on the approved LME brand list have the option to deliver this metal into an LME warehouse and place it on LME warrant, thus enabling delivery against an LME contract. This is often an important consideration when discussing financing arrangements for metal with a lender. The lender will derive comfort from the fact that the metal can be sold at short notice, if required, in order to repay the outstanding borrowing. This can result in lower financing costs.
For the producer, having their metal production listed as an LME brand provides them with a market of last resort. When the COVID-19 crisis broke out globally in March 2020 and demand for metal evaporated overnight, producers had the option to deliver metal against LME contracts. This is what is called the “terminal market” function of the LME. In the normal course of business, producers primarily sell directly to clients, but if that demand falls away, LME deliverability constitutes a valuable alternative.
HOW DOES A PRODUCER LIST THEIR METAL ON THE LME?
Producers of LME brands have to satisfy a number of strict quality requirements and these are further detailed below. (As mentioned, responsible sourcing requirements are not covered in this article.)
Requirements common for all metals include:
- Minimum track record of 12 months in the business
- Minimum production capacity – differs for each metal
- ISO 9001 certification – or equivalent
- References from clients
- Identify a Category 1-5 member which will process the application on behalf of the brand
- The metal will need to be quality tested. (Details of the LME listed sampler and assayers which carry out this assessment of quality can be found here.)
- A listing fee of US$65,000
The requirements differ slightly from one metal to another, in order to account for their specificities. A comprehensive list of requirements for each LME metal and an overview of the brand listing process can be found here.
Brands are an essential component of the LME’s physical ecosystem. A robust set of criteria to which producers adhere and a well-maintained brands list, give participants the level of certainty on which their on-exchange risk-management transactions are dependant. That certainty also underpins price discovery, and buyers and sellers of metal therefore transact on a price they can trust. Furthermore, thanks to brands, producers who list their metals on the LME gain a market of last resort as well as enhanced marketing and financing opportunities.
If you are a metal producer and would like to explore listing your production as an LME brand, please contact our brands team.
For any queries, please get in touch with our sales team.