In this blog of Hedging with Jorge, we conclude our exploration of the third core function of the London Metal Exchange (LME): delivery. After diving into cash settlement and reversing futures positions, we now take a close look at what it means to physically deliver aluminium when you’re short on the futures market.
The delivery side of a short position
So, what happens when you are short on aluminium futures and opt not to settle in cash? Delivery becomes your only option. If the position is close to expiry and you choose delivery, the process must be initiated in advance. This means preparing the physical metal to be delivered to any of LME’s 500+ approved warehouses spread across 14 countries and 32 locations.
The rules around deliverable aluminium
You can’t just deliver any aluminium, you must deliver registered brands approved by the LME. These brands meet quality and certification standards. Once delivered, you receive a warrant, a digital document confirming your metal is now stored and certified within the LME system. This warrant is transferred through your broker, who then closes your short position by settling the payment.
Strategic considerations and market realities
While this process may sound straightforward, market conditions add complexity. Delivering into LME warehouses means incurring costs leading to a negative premium. This differs from regular market transactions where sellers often earn a premium over LME prices due to transportation and logistics.
Why would someone accept a negative premium? Two key examples:
2008–09 Financial crisis – Sellers couldn’t find buyers in the open market and chose LME delivery to raise cash quickly.
Credit risk – There were buyers, but confidence in payment collection was low. Delivering to the LME offered a safer route.
A one-price global market, adjusted locally
While the LME sets a global benchmark price for aluminium, actual transaction prices vary by region through premiums. These account for costs like freight, insurance, and handling. A thriving market exists solely for these premiums.
Jorge wraps up by highlighting how this delivery mechanism offers flexibility, especially in volatile times. But it also requires strategic foresight, an understanding of costs and an appreciation for risk.