Premiums contracts are designed to help physical traders hedge the premium portion of the ‘all-in’ commodity price, representing different geographical freight and supply/demand constraints. Despite volatility in premiums for different geographical delivery points, it wasn’t until 2012 that the first premium contracts were listed to enable the market to hedge its exposure to physical deliveries. Copper is the latest market to benefit from a China-focussed futures contract launched in 2017 to complement physical trading and enable enhanced risk management. Aluminium is the world’s most popular exchange-traded metal commodity at over 5 million tonnes per day, it accounts for nearly a third of all contracts concluded on LME, with over 100 brands traded. Aluminium premium contracts first traded in September 2013 and the growth in volumes since that period has significant, with 3.58 million tonnes trading in the year to October 2017 versus 2.51 million tonnes in 2016. 2017 saw the start of trading of Copper Premium Grade A CIF Shanghai on CME – the first financially-settled exchange-traded product which enables hedging to the China copper premium.
Base metals traded primarily on LME have been a fixture of commodity markets for over 100 years and continue to be traded across the globe. The recent strong prices and bullish sentiment are attracting new market players and have prompted physical producers to invest in reopening production and in turn hedging to protect against future price volatility. Many analysts predict the strong pricing to continue long into 2018 on the back of tight supply, however, slower-than-anticipated demand from China would suggest the reverse setting the markets up for a volatile period ahead in which FIS can capitalise. As an Agent for a Category one member, FIS will be broking both LME futures and options contracts on copper, aluminium, zinc, lead, nickel and tin. In 2017, 157 million lots of base metals were traded on the LME equating to $12.7trn equivalent to 3.5bn tonnes. FIS will work to facilitate clients in more efficient price discovery for these commodities and actively help hedge against adverse price movements.