How do exchange rate fluctuations affect metal prices?

How do exchange rates work?

Exchange rates are vital to trading economies like Britain’s. They represent a cost to businesses from commissions paid on currency exchanges. They also create a risk for the companies holding assets in foreign currencies. The exchange rates falling out of the bottom of all this activity affect the price of exports and imports, which in turn drive demand and the balance of payments. And the government takes exchange rate into account when setting short term interest rates.

An example of metal market volatility

Take the base metals reports provided by basemetals.co.uk. They report daily on base metals prices, which reveals the extraordinary volatility of the market. As reported on 8th February 2016, base metals prices quickly dropped back from high positions on 5th February, down an average of 2.2% at the close of play, with more than 5% drop in Nickel, 2.7% on Zinc and 2.1% price drops for Aluminium and Lead. Copper closed down 1.6% but Tin rose just over half a percent. On 5th February the metals market was ‘jittery’ in the face of the USA’s latest tranche of employment data, and this edgy nervousness is set to continue as the global ecomony changes.

London Metal Exchange’s contracts help hedge the all-in aluminium price.

LME conducts a massive 90% of the world’s aluminium futures business, the world’s biggest centre for industrial metals trading. The prices shown on their three trading platforms form the global reference price. Both the metals sector and investment communities use it. All because all this exchange rate volatility doesn’t help matters, they’ve created a suite of Aluminium Premiums, a new kind of contract that helps the metals industry hedge the premium portion of the ‘all-in’ aluminium price, for better global liquidity and regional flexibility.

The result is a ‘transparent, supply-and-demand-driven premium price discovery mechanism’, which allow those involved to get hold of readily available material in non-queued warehouses. LME says that by trading existing LME Aluminium parent contracts and the new ones mean the market can get access to liquid global LME market and reference prices, and manage their exposure to risks posed by dynamic regional market while they’re at it.

What can you do about it?

Unfortunatley when the markets are as volatile as they are now there is a limited amount of comfort for any of us. The very best that you can do is invest more time and energy in forecasting your metal requirements and get closer to your metal supplier to plan to meet your needs and budgets.

THE LATEST FROM THE BLOG