What is the metal exchange and what is the Copper futures market?
Metal Exchanges
In the early 19th century there were so many metal traders, ship charterers and financiers using a variety of venues to trade that it became impossible to do business. Eventually the concept of a trading ring was developed and finally in 1877 a number of British based traders formed the London Metals and Mining Company that became the LONDON METALS EXCHANGE ("LME") as it is know today. Based on this same concept a number of other metal trading exchanges were formed such as New York Mercantile Exchange ("NYMEX) or the Shanghai Metal Exchange ("SHME").
Futures market
Prior to futures trading, copper producers were at the mercy of metals dealers. Thus producers wanted to sell copper, a system was developed to legalise the buying and selling of copper in order that a specified amount and quality of product could be traded between producers and dealers at a specified date to allow an open and certain price environment. This would allow better planning and financial management of producers and users of copper.
Future contracts were drawn up between the two parties specifying a certain amount and quality of a commodity that would be delivered in a particular month in the future at a set price. A futures contract is a legally binding obligation for the holder of the contract to buy or sell a particular amount of copper at a specific price and location at a specific date in the future. The contracts are standardized to make sure that the prices mean the same thing to everyone in the market; everyone trades contracts with the same specifications for quality, quantity, and delivery terms. A typical copper contract for London Metal Exchange is as follows:
Copper Grade A Futures Contract Specification (from the London Metal Exchange)
| Contract |
Grade A Copper |
| Lot size |
Lot size 25 tonnes (with a tolerance of +/- 2%) |
| Form |
Grade A cathodes conforming to BSEN 1978:1998 |
| Weight |
Each parcel of copper cathodes placed on warrant shall not exceed 4 tonnes |
| Delivery dates |
Daily for cash to 3 months (first prompt date two working days from cash). Then every Wednesday from 3 months to 6 months. Then every third Wednesday from 7 months out to 63 months |
| Quotation |
US dollars per tonne |
| Minimum Price Movement |
Ring - Outright $0.50, Carries $0.01
LME Select - Outright $0.25, Carries $0.01
Inter-office - Outright/Carries $0.01 |
| Clearable currencies |
US dollar; Japanese yen; sterling; euro |
Copper price Backwardation and Contango
Backwardation is a futures market term: it means a downward sloping forward curve (as in an inverted yield curve): meaning the price of copper for future delivery is lower than the current spot price, or a far future delivery price is lower than a nearer future delivery. Contango is opposite of backwardation and is a term in the futures market to describe an upward sloping forward curve. Formally, it is the situation where, and the amount by which, the price of a commodity for future delivery is higher than the current spot price, or a far future delivery price is higher than a nearer future delivery.
The factors that cause backwardation or contango relate to inventory levels and storage costs for holding copper. If inventory levels are low and storage costs are high there is premium placed on the nearer term delivery of copper and as a result future prices tend to be lower than current prices.
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