4
Base Metals
The American penny consists mainly of zinc and copper and at one stage in 2006 the rise in the price of base metals was such that the value of the constituent metal nearly exceeded its face value. This prompted the US government to issue a public warning that it was an offence to melt down coins.
SYNOPSIS The purpose of this chapter is to describe the market for base metals, how they are traded and some common derivative structures.
 
This chapter covers the metals classified as either “base” or “industrial”. This family of metals includes aluminium, copper, nickel, lead, zinc and tin. Although there are other metals that may fall into this category – such as steel – the selection has been based on those metals where an active traded market exists.
The chapter focuses on two of the most liquid traded base metals, aluminium and copper. The role of the London Metal Exchange (LME) is outlined and the main features of the instruments traded there are detailed.
One of the features of the base metals market is that physical metal contracts are often referenced to the LME price. The factors that affect market prices and their term structure are analysed.
The final section of the chapter covers the main applications of derivatives within the automotive industry. A wide range of structures is considered from simple forwards to structured option solutions.

4.1 BASE METAL PRODUCTION

Typically the mining process will begin with a geological survey of an area with test drilling ...

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