LME established as primary price quote for sales of lead

The London Metal Exchange (LME) is a commodities market in London, England, that acts as a worldwide trading centre for metals.

Producers and consumers use its daily official prices for lead, copper, zinc, aluminum, nickel and silver. The LME has become the most recognized and most readily available price quote to use in negotiating contracts. Founded in 1877, the LME only recently became of major significance to the U.S. lead industry. In 1988, a U.S. lead producer began offering a LME price to customers. By 1991, in response to consumer pressure, most U.S. lead producers were using the LME price.

Now the U.S. price of lead is linked to world inventories, investor speculation and the exchange rate of the dollar to the British pound sterling. If the dollar is strong (that is, the dollar is worth more in comparison to the pound), the price of lead is low and it takes fewer dollars to buy lead. If the dollar is weak, it takes more dollars to buy an equivalent amount of lead.

In theory, the LME enhances the free trade aspects of production and consumption, because everyone is aware of the materials available (inventory) and the going price. In practice, the futures market is used by speculators, who can cause the market to take a turn that has little to do with supply and demand.

For example, earlier this year, the LME price was US41.2 cents per lb.; two weeks later it jumped to 60 cents; another two weeks later it had fallen back to 37.5 cents.

“We were never able to predict where exactly the lead market would go,” said Greg McClain, sales manager for The Doe Run Co., “but now both ends of the spectrum — the ups and downs — are blown out by the LME. In the last year we’ve seen the record highs and lows of the past five years.” Because Doe Run and other U.S. lead producers are now linked to the global market, one company’s operations — and even the total U.S. lead inventory — have less influence on the overall price of lead. For example, Doe Run’s production cutbacks this spring decreased U.S. lead production by 6% with no effect on the price of lead, because the cuts were only 1.5% of the world market.

This article appeared in a recent issue of Elements, a publication of The Doe Run Co. of St. Louis, Mo.