United Nations Conference on Trade and Development

MULTI-YEAR EXPERT MEETING ON COMMODITIES AND DEVELOPMENT

21-22 April 2016, Geneva

How developing nations can efficiently use the commodity markets to manage their risk

By

Mr. Robert Fig, Head, Physical Market Sales, London Metal

Exchange

The views expressed are those of the author and do not necessarily reflect the views of UNCTAD.

Presented by Robert Fig UNCTAD

21 April 2016 – London

Recent developments and new challenges in the

commodity markets: Minerals Ores and Metals

1

The Ring: global reference price The home of global metals markets since 1877 with London trading routes back to 1500’s

1800’s 1950’s

1994-2016

Leadenhall Street

1970s

2016

#10 Finsbury Square

1970’s

2

The LME is the leading metal exchange LME Share of exchange metal traded

100%

92%

60%

100%

64%

91% 93%

74%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 LME market share

AA Al Cu NA Ni Pb Sn Zn

3

Global commodity markets are down

Data as of 14th April 2016

Source: LME, Bloomberg

Only Tin is up since 2007 whilst lead is flat

Losses as much as 72% Nickel and 87% Baltic Dry Index

0

50

100

150

200

250

300

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Copper 3 Month ($/mt) Nickel 3 Month ($/mt) Oil ($/bbl) Zinc ($/mt)

Aluminium 3 Month ($/mt) Baltic Dry Index Lead 3 Month ($/mt) Tin 3 Month ($/mt)

Tin +58%

Lead +2%

Nickel -73%

Baltic -87%

Oil -25% Cu -18%

Al -44% Zinc -55%

Index 2007=100

4

Natural resources exposure

Source: World Bank, 2014 data

Sum of resource rents as % of GDP

*additional benefits from manufacturing and equipment

33%

Angola: Oil 16%

Chile: Copper 16%

Zambia: Copper

7%

Australia: Iron Ore

8%

South Africa: Gold, PGM’s

6%

Indonesia: Palm Oil, Copper, Nickel

5

A diverse marketplace

Protect value of

mining assets

Protect margins

during smelting

process

Protect value of

physical stocks

Protect value of

metal content

Protect against

increasing material

costs

Mining Mining Companies

Smelters Smelter and

Refinery Companies

Consumers Cable, tube, and

automotive

companies

Merchants Trading Houses

Recyclers Recycling companies

Scrap trading

companies

Orders

Market

Makers Banks

Liquidity

Brokers Investors

6

Physical usage of LME Copper Identified Client Volumes by type

Identified Client contract volume

Source: LME Research

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Producer / Merchant /Processor / User

Money Manager Algo/Prop Broker Dealer / IndexTrader

Other Reportables

7

0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8

Hedging community dominates the LME Nickel Positions held by the hedging community outnumber money managers 1:1.6

* COTR Open Interest Ratio is for Long+Short average over one year

Entities are classified at broker discretion according to the primary function of the entity. Entities

may be involved in dual business

Money Manager Positions> Hedging Positions Hedging Positions> Money Manager Positions

CME Copper

Average over 12 months:

LME Copper

LME Nickel

8

Continued investment: physical relevance Pricing is anchored in the physical market thanks to a wide range of deliverable brands

Copper Aluminium Australia, 2 Australia, 4 New Zealand, 1

Copper Aluminium Oman, 1 Oman, 1 Egypt, 1 Iran, 1 UAE, 2 Bahrain, 1 Qatar, 1 Saudi Arabia, 1

Copper Aluminium China, 13 China, 17 India, 4 India, 8 Indonesia,1 Indonesia, 1 Japan, 8 Malaysia, 2 Laos, 1 South Korea, 2 Myanmar, 1 Philippines, 1

Copper Aluminium Canada, 1 Canada, 11 USA, 8 US, 9

Copper Aluminium Zambia, 2 Mozambique, 1 South Africa, 1 South Africa, 1 Cameroon, 1

Copper Aluminium Russia, 3 Russia, 11 Kazakhstan, 1

Copper Aluminium Brazil, 2 Argentina, 1 Mexico, 1 Brazil, 5 Chile, 22 Venezuela, 1 Peru, 3

Copper Aluminium

Bulgaria, 1 France, 2

Finland, 1 Montenegro, 1

Austria, 1 Slovakia, 1

Belgium, 1 Germany, 2

Germany, 2 Greece, 1

Norway, 1 Iceland, 3

Poland, 3 Netherlands, 1

Spain, 1 Norway, 6

Sweden, 1 Romania, 1

Spain, 2

UK, 1

9

Warehouse Locations Over 650 warehouses approved by the LME - 14 countries, 35 locations

& LME Shield with MOU to develop along Belt and Road routes

1. Johor, Malaysia 2. Singapore 3. Port Klang, Malaysia

1. Busan, South Korea 2. Gwangyang, South Korea 3. Incheon, South Korea

1. Nagoya, Japan 2. Yokohama, Japan 1. Baltimore, Maryland

2. Chicago, Illinois 3. Detroit, Michigan 4. Los Angeles, California 5. Mobile, Alabama 6. New Orleans,

Louisiana 7. Owensboro, Kentucky 8. Panama City, Florida 9. St. Louis, Missouri 10.Toledo, Ohio

1. Dubai, UAE

1. Antwerp, Belgium 2. Bremen, Germany 3. Hamburg, Germany 4. Genoa, Italy 5. Leghorn, Italy 6. Ravenna, Italy 7. Trieste, Italy 8. Moerdijk, Netherlands 9. Rotterdam, Netherlands

10.Vlissingen, Netherlands 11.Barcelona, Spain 12.Bilbao, Spain 13.Helsingborg, Sweden 14.Hull, UK 15.Liverpool, UK

1. Kaohsiung, Taiwan

Silk Road Economic Belt

Maritime Silk Road

10

LME remains the market of choice Copper Open interest in tonnes

0

2

4

6

8

10

12

14

16

18

Millio

n t

on

nes

LME SHFE CME

11

SHFE day trading bias

* Ratios taken over average of Q4 2015 – same trend LME>SHFE is consistent throughout

history.

LME volumes exclude admin and member give up trades

0x

1x

2x

3x

4x

5x

Aluminium Copper Zinc Nickel

Op

en

in

tere

st/

AD

V (

Q4

20

15

)

Open interest in days of volume

LME

SHFE

12

$8,000

$8,500

$9,000

$9,500

05

101520253035404550

Ma

r-1

6

Ma

y-1

6

Jul-1

6

Sep-1

6

No

v-1

6

Jan-1

7

Ma

r-1

7

Ma

y-1

7

Jul-1

7

Sep-1

7

No

v-1

7

Jan-1

8

Ma

r-1

8

Ma

y-1

8

Jul-1

8

Sep-1

8

No

v-1

8

Jan-1

9

Ma

r-1

9

Ma

y-1

9

Jul-1

9

Sep-1

9

No

v-1

9

Jan-2

0

Ma

r-2

0

Ma

y-2

0

Jul-2

0

Sep-2

0

No

v-2

0

Jan-2

1

Ma

r-2

1

Ma

y-2

1

Th

ou

san

ds

Open Interest LME Nickel 3 Month ($/mt)

LME holds further out positions

Data as of March 16th 2016

LME forward curve trades out to 63 months

Shanghai open interest is concentrated on one month

¥66,000

¥67,000

¥68,000

¥69,000

¥70,000

¥71,000

0

50

100

150

200

250

300

350

400

450

Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17

Th

ou

san

ds

Open Interest Last Price (CNY/mt)

LM

E

SH

FE

Nic

ke

l L

ME

Nic

ke

l

13

SHFE Nickel launches new arbitrage market

** Pre 7am % is limited to 3M outright on LMESelect

0%

5%

10%

15%

20%

25%

0

100,000

200,000

300,000

400,000

500,000

600,000

LM

E 3

Mo

nth

Sele

ct

($/m

t)

SH

FE

Nic

kel

AD

V (

lots

)

ADV SHFE Nickel (lots) LME NI %age pre 7am

SHFE Contract

launches March

27th

Pre launch avg: 8%

Post launch avg: 15%

14

© The London Metal Exchange (the “LME”), 2016. The London Metal Exchange logo is a registered trademark of The London Metal Exchange. All rights reserved. All information contained within this document (the “Information”) is provided for reference purposes only. While the LME endeavours to ensure the accuracy, reliability and completeness of the Information, neither the LME, nor any of its affiliates makes any warranty or representation, express or implied, or accepts any responsibility or liability for, the accuracy, completeness, reliability or suitability of the Information for any particular purpose. The LME accepts no liability whatsoever to any person for any loss or damage arising from any inaccuracy or omission in the Information or from any consequence, decision, action or non-action based on or in reliance upon the Information. All proposed products described in this document are subject to contract, which may or may not be entered into, and regulatory approval, which may or may not be given. Some proposals may also be subject to consultation and therefore may or may not be implemented or may be implemented in a modified form. Following the conclusion of a consultation, regulatory approval may or may not be given to any proposal put forward. The terms of these proposed products, should they be launched, may differ from the terms described in this document. Distribution, redistribution, reproduction, modification or transmission of the Information in whole or in part, in any form or by any means are strictly prohibited without the prior written permission of the LME. The Information does not, and is not intended to, constitute investment advice, commentary or a recommendation to make any investment decision. The LME is not acting for any person to whom it has provided the Information. Persons receiving the Information are not clients of the LME and accordingly the LME is not responsible for providing any such persons with regulatory or other protections. All persons in receipt of the Information should obtain independent investment, legal, tax and other relevant advice before making any decisions based on the Information. LME contracts may only be offered or sold to United States foreign futures and options customers by firms registered with the Commodity Futures Trading Commission (CFTC), or firms who are permitted to solicit and accept money from US futures and options customers for trading on the LME pursuant to CFTC rule 30.10.