How the industrial metals market works

What they are for 

The base metals are inputs to physical construction, and every one of them is bought by somebody who intends to turn it into something and sell that instead. Nobody holds a warehouse of zinc as a reserve asset. This is the sharpest distinction between them and the precious metals: demand is derived from the production of other goods, so a base metal price is a statement about the level of industrial and construction activity in the world, filtered through the cost of producing the metal itself.

• Copper conducts electricity better than any affordable alternative, so it goes into wiring, motors, transformers, grid infrastructure, electric vehicles and the windings inside almost everything that turns. Its breadth of use across construction, manufacturing and power is the reason its price is treated as a rough indicator of industrial conditions.
• Aluminium is light, corrosion resistant and cheap to recycle, and it goes into transport, packaging, building facades and transmission cable. Producing it from ore is extraordinarily electricity intensive, so a smelter's economics are dominated by the price of power, and its price carries an energy story that the other base metals carry only faintly.
• Zinc is used principally to galvanise steel against corrosion, which ties it closely to construction and infrastructure and gives it a narrower demand base than copper.
• Nickel goes into stainless steel and into battery cathodes, and those two uses require different grades that are not interchangeable, so the market is genuinely two markets sharing one price reference.

The exchange and warehouse system 

Base metals price principally on a London exchange whose structure is older and stranger than the exchanges that price other commodities. It quotes a cash price and a three month forward price rather than a strip of monthly contracts, a legacy of the sailing time it once took to bring metal from overseas, and it maintains a network of approved warehouses around the world into which deliverable metal can be placed. Metal held in one of those warehouses is represented by a warrant, and the daily published stock of warranted metal is the market's most watched physical statistic.

Two other venues matter. A North American exchange lists a copper contract quoted in cents per pound rather than dollars per tonne, which is the origin of the two different quoting conventions a reader will encounter for the same metal. A Shanghai exchange lists contracts in yuan per tonne with its own warehouse system, and the price difference between it and London, adjusted for freight, duty and currency, is watched as a measure of Chinese physical demand relative to the rest of the world.

Warehouse stocks are informative and also imperfect. Metal can sit outside the exchange system entirely, in bonded warehouses, in producer inventory or in financing arrangements where the metal is held as collateral rather than for use, and none of that appears in the published figure. A fall in exchange stocks can therefore mean metal was consumed, or that it moved somewhere unreported, and the two have very different implications.

Who trades them 

• Miners and smelters, selling forward production and hedging the treatment and refining charges that sit between concentrate and finished metal.
• Fabricators and manufacturers, from cable makers to galvanisers to stainless steel mills, hedging an input cost that is a large share of their finished product's price.
• Construction and infrastructure contractors with fixed price contracts, exposed to metal costs they have already committed to bear.
• Physical trading houses running warehouse and financing books, whose arbitrage between locations and dates is what connects the exchange price to physical availability.
• Financial participants, including funds using copper as an expression of a view on industrial activity rather than on the metal itself.

What moves them 

Industrial activity data is the primary demand input, and the manufacturing surveys published monthly for the major economies are read as a leading indication of it. Chinese data carries disproportionate weight because Chinese consumption is disproportionately large in every one of these metals, so property completions, grid investment announcements and infrastructure programmes in that one country move a global price. Electrification programmes have added a slower structural demand narrative, particularly for copper, and structural narratives move prices through positioning long before they move them through physical consumption.

On the supply side the observable inputs are mine production reports, ore grades, treatment charges, smelter outages, energy prices and trade measures. Energy deserves separate mention: smelting is one of the most electricity intensive industrial processes there is, so a sustained rise in power costs raises the marginal cost of production and can take capacity offline outright, which is a supply constraint arriving through an entirely different market.

Concentration risk applies here as it does in the platinum group, though less severely. Some of these metals have production concentrated in a small number of countries and refining concentrated in fewer still, so export restrictions, sanctions and permitting decisions are recurring price events. One episode in nickel is instructive as a structural warning rather than as a prediction: a very large short position held against a metal whose deliverable grade was scarce produced a violent squeeze, trading was suspended and executed trades were cancelled by the exchange. It is the standing reminder that a thin deliverable pool and a large concentrated position can break the ordinary functioning of a market.

Units, and reconciling two conventions 

The same metal is quoted in different units on different venues, which is a routine source of confusion when comparing a headline against a screen. Copper is quoted in US dollars per metric tonne in London and in US cents per pound in North America, and the two are reconciled with a single conversion factor. Aluminium, zinc and nickel are conventionally quoted per tonne. Whichever convention an instrument uses is stated in its contract specifications, and the arithmetic below is the whole of the reconciliation.

When they trade 

Electronic trading in the base metals runs for most of the day, and the exact session for each instrument is published in its contract specifications. Depth is heaviest through the London morning and afternoon, where the physical market and the exchange's own pricing conventions are centred, and again where the London afternoon overlaps the North American morning. The Asian session carries real volume in copper because of the Shanghai market, and materially less in the others. These are thinner markets than crude or gold at every hour, and quoted spreads reflect that.

How a CFD on an industrial metal settles 

A contract for difference on an industrial metal references its price and settles in cash. No metal is warranted, no warehouse position is created and no delivery obligation arises. The difference between the opening and the closing price is multiplied by the number of units the contract covers, stated in tonnes or in pounds according to the convention of the instrument, and that amount passes between the two parties.

Profit and loss is calculated on the full notional value while only a percentage of it is posted as margin, so an adverse move is measured against the whole contract and a loss can exhaust the margin posted rather than being limited to it, with a favourable move measured identically. Margin requirements on the base metals are commonly set above those on the major precious metals, reflecting both wider observed ranges and thinner depth.

Where an instrument references a dated contract it inherits that contract's last trading day and is closed or rolled on a date published in its specifications. Because base metal curves are frequently in contango, reflecting the real cost of storing and insuring tonnes of metal, the roll on a continuously held position is more often a cost than a credit, and that cost is a function of the curve shape rather than of price direction. A position held past the daily cut off also carries a financing adjustment.