مـؤتـمـر الألـومـنيوم العربـي الـدولـــي 20 – 22 نوفمبر 2012 الدوحة | قطر

1. مـؤتـمـر الألـومـنيوم العربـي الـدولـــي20 – 22 نوفمبر 2012الدوحة | قطر ARAB INTERNATIONAL ALUMINIUM CONFERENCE 20 – 22 November 2012 Doha | Qatar

2. Tuesday, 20th November 2012 Workshop: London Metal Exchange “LME” Mr. Martin Abbott CEO, LME 10:00 – 12:00

3. ARABAL QATAR 2012 Martin Abbott Chief Executive 20 November 2012, London

4. The history, purpose and workings of the London Metal Exchange You will learn about • History and background • Pricing • Market Terminology • Warehousing and delivery • Trading at the LME • The Ring • The role of the LME broker/dealer • Clearing • Regulation • LME Data and other services

5. Introduction to the LME The training takes from 9.00am to 5.00pm, including a visit to the viewing gallery to watch the final trading session. You are most welcome to ask questions throughout the day. And if you have any follow up queries or problems after the course or issues to clarify - you can email us direct at education@lme.com The LME has a team of trainers who can come to you and talk about how hedging works, business development and any associated topics relevant for your area of business.

6. The London Metal Exchange Established in response to Industrial revolution • high metal consumption and so imports from abroad Risk of price falls during long shipping voyages Need to formalise trading into one marketplace: • fixed trading times • standard contract specifications • source of price ‘discovery’

7. LME volumes 2012Near 120 million lots, 9% up year on year

8. Role and contracts of the LME

9. Primary services of the LME Pricing Terminal Market Hedging Delivery Primary Role of LME Price Convergence

10. Pricing methods

11. Different pricing methods Producer pricing Survey pricing LME pricing

12. Producer pricing Prices established by producers either yearly, half yearly or quarterly • Advantages • Reflects an understanding of consumers • Traditional method • Disadvantages • Price increases due to rising raw material prices • Not transparent • Lack of flexibility

13. Survey pricing Prices are generally recorded and disseminated when both buyers and sellers confirm a transaction behind a price to an industry publication e.g. Metal Bulletin, Steel Business Briefing • Traditional and industry recognised • Global and regional representation • Comfort level - third party discovery • Wide range of prices and grades • Historic, averages • Quotes may not be competitive • Lack of transparency • Methodology • Prices and tonnages

14. LME pricing LME Prices have to reflect the material activities of the market • Unique price set by demand and supply • Transparent • Traded and tradable real time prices • Heavily regulated market • More accurate hedging

15. What does the LME price represent? The LME price represents material: • Of an LME registered brand • Stored in an LME approved warehouse • Duty unpaid • Buyer to pay for delivery out of warehouse

16. The metals value chain How to use an LME price LME price plus production costs and profit margin LME price minus discount LME price minus discount LME price Semi Fabricated Products Mining Concentration Smelting Metal Products Cathode Billet Low Metal Content Wire Rebar Ingot Cans

17. How to use an LME price The price for normal physical sales, if using LME pricing as a basis, will be the LME price adjusted for: • Grade differential versus LME grade • Differential for favoured brand • Differential for favoured location versus the LME approved delivery point • Packaging differential • Delivery differential to consumer works • Timing differences • Volume or other discounts / premiums etc

18. In most of these examples, we will be isolating the commodity cost from other costs Profit margin Overheads Production costs Raw materials cost – the commodity Other hedgeable costs i.e. energy, fx, freights,… Total Sales Price

19. What is hedging? Hedging Establishing a position in a commodity futures market (LME) which is equal and opposite to a risk on a physical market. • Protects against adverse price movements • Locks in an agreed profit margin • Protects inventory value

20. Hedging is addressing risk positions • A Risk position is one that has an uncertain outcome, a position which may make or lose money depending on market movements • It is a purchase not yet matched with a sale or a sale not yet matched with a purchase • A LONG position will make a profit if the price goes up; a loss if the price goes down • A SHORT position will make a profit if the price goes down; a loss if the price goes up • If you are SQUARE, you will not be affected by market movements but you may still have basis risk

21. Hedger vs. speculator • A Hedger starts with a price exposure, buys or sells futures contracts, and therefore offsets the price exposure. • A Speculator starts without price exposure, buys or sells futures contracts, and takes on price exposure

22. Two distinct markets Futures market • Material at semi-converted stage • Market participants • Members • Investment funds • Traders • Producers/smelters • Converters/fabricators • Merchants/distributors • End Users • Physical market • Material at any stage of production • Market participants • Traders • Producers / smelters • Converters / fabricators • Merchants / distributors • End Users

23. Speculators • Who are the speculators? • Technical funds/Algos/HFTs: momentum strategies • Hedge funds: exploit price anomalies • Passive investors: buy and hold • Market-makers: buy low, sell high • FCMs (Futures commission merchant) • CTAs (Commodity Trade Advisers) • CPOs (Commodity Pool Operators) • Most investors pursue strategies that have a neutral or counter-cyclical impact on prices i.e. they buy when they perceive the price to be lower than fair value and sell when it is above fair value.

24. Prompt date structure

25. LME Date Structure

26. Rolling prompt dates • Cash – Two business days from today • Tom – Tomorrow’s date • 3 months – 3 calendar months from today

27. LME Aluminium Alloy and LME NASAACFutures and options contracts 20 tonnes Settlement up to 27 months Industry usage: The main consumers, auto manufacturers, use different grades of alloy in different regions of the world. While the LME contract was being traded for customers in Europe and the Far East it was evident that it was not gaining acceptance in North America.  For this reason, the LME entered talks with secondary smelters, scrap dealers, consumers, traders and merchants in the US to develop the LME's first ever regional contract.

28. LME AluminiumFutures and options contracts 25 tonnes Settlement up to123 months, options up to 63 months Industry usage: It is extremely light, pliable, has high conductivity and is resistant to rust. Little wonder then that it has become the most extensively used metal and more recently the largest contract traded on the LME.

29. LME traded and cleared currencies LME contracts trade in US Dollars LME contracts can also be cleared in the following currencies: Euro GB Sterling Japanese Yen

30. LME published prices Pricing basis –in warehouse, duty unpaid • Asian Benchmark • published 07.30 GMT (08.30 BST) • Official Prices • prices from the 2nd Ring Close • Cash, 3M, Dec 2013, Dec 2014, Dec 2015 • Settlement Price • Official “Cash” sellers price • Closing Prices • referred to as “evening evaluations” established at 5pm • used by LCH for daily margining purposes • used by members for risk management

31. Market terminology

32. LME Instruments • Futures • Options • Warrants • LMEswaps

33. What is a futures contract? A future is an agreement to buy or sell a standard quantity of a specified asset (material) on a fixed date at a standard quantity specified asset (material) price agreed today

34. LME traded options contracts “The purchase of an option gives the buyer (of the option) the right but not the obligation to buy or sell an underlying futures contract for a fixed delivery date at a fixed price”

35. LME traded options contracts A call option The right to buy A put option The right to sell

36. LME terminology • Positions: • net total of open futures contracts a party has against a particular prompt date • Short • sell futures • Long • buy futures • Prompt date • settlement date of a futures contract

37. Settlement of LME contracts Settlement on prompt date by: • Financial settlement of futures contract • Buy / sell an equal and opposite position and / or • Delivery • Using LME Warrants, the method by which LME contracts are delivered

38. When to close an LME position • Usually two days before prompt (Cash) Usually no later than… • TOM • Must be executed before 12.30pm (client contracts) • Usually prompt adjusted to cash • Adjustment trade called ‘tomorrow next day’ (Tom Next)

39. Forward prices • Forward prices the prices being quoted for delivery dates beyond the cash prices • Contangonearby price of material is lower than the forward price • Backwardationnearby price of material is higher than the forward price • “The Spread” the Cash to 3 months forward curve difference • Carry difference between 2 forward prices

40. Forward price - Contango P R I C E Quoted price for forward dates t 1 2 3 Forward dates

41. Forward price - Contango LME Aluminium: 3 Sept 2012

42. The maximum contango LME Aluminium Cash to 3 months Cash price $1820.00 Cost to finance + $ 23.50 Warehouse rent + $ 34.20 Insurance + $ 3.00 3 month price $1880.70 • What would traders do if the cash price was $1820 and the 3 months price was $1885?

43. The maximum contango Cash to 3 months Cash price $2500.00 Cost to finance + $ 31.25 Warehouse rent + $ 34.20 Insurance + $ 3.00 3 month price $2568.45

44. Forward price - Backwardation P R I C E Quoted price for forward dates t 1 2 3 Forward dates

45. Forward price - Backwardation LME Cobalt: 4 Jan 2012 There is no theoretical maximum backwardation

46. Forward priceContango and backwardation LME Copper: 3rd Sep 2012

47. Carries

48. Moving positions – why? You are a copper mine and you have sold futures prompt 1st July. Why might you want to move that position to a later date? Or an earlier date? You are a speculator who has bought futures. Why might you want to roll the position forward? You are a car manufacturer and have bought futures prompt October. Why might you want to change that date? A Carry is the simultaneous purchase (sale) and sale (purchase) of the same quantity of same metal for different Prompt dates

49. Carries October November SELL (Short) Sell Buy BORROW • Short position • Selling on LME • Want to delay prompt date • Borrow (buy then sell)

50. Carries October November LONG (Buy) Buy Sell LEND • Long position • Buying on LME • Advance LONG position forward • Lend (sell then buy back)