In brief
- LME prices are in dollars per tonne: for a European company the euro price depends on two variables, the metal quotation and the euro-dollar exchange rate.
- There are several "official" rates: the LME fixing, used by the exchange to convert its own prices; the ECB reference rate, published once a day at around 16:00 CET; market spot quotations; monthly averages. A contract must say which one.
- The conversion is a division: euro price = dollar price divided by the euro-dollar rate. A stronger dollar (lower rate) raises the euro price for the same LME quotation.
- The dollar and metals tend to move in opposite directions: when the dollar weakens, dollar prices of metals tend to rise. For euro buyers it is a partial natural hedge, not a rule.
- Currency risk is hedged separately from price risk: forward contracts and options on the euro-dollar, with maturities aligned to the quotational periods of the metal.
Why the exchange rate matters as much as the price
The London Metal Exchange quotes non-ferrous metals in US dollars per tonne: it is the currency of world commodity trade, for copper since 1993 and for aluminium since the contract was born. Anyone producing or processing metal in the euro area, however, collects and pays in euro: every purchase goes through a conversion, and every move in the exchange rate changes the cost of metal even with an unchanged LME quotation.
The order of magnitude is anything but negligible. A 5% move in the euro-dollar rate in a quarter — normal in recent history — is worth as much as a 5% move in the LME price. That is why companies indexing their price lists to the LME follow the exchange rate with the same attention reserved for the quotation, and supply contracts devote a specific clause to it.
Which rate: LME fixing, ECB reference, spot, averages
There is no such thing as "the" euro-dollar rate of a day: there are several readings, with different times and uses. The main ones are four.
The conversion, with an example
The euro-dollar rate expresses how many dollars one euro is worth: 1.10 means one euro buys 1.10 dollars. To go from a dollar price to a euro price one divides: euro price = dollar price / rate. With LME cash copper at 9,000 dollars per tonne and the rate at 1.10, the price is 8,182 euro per tonne.
If the rate falls to 1.05 — a stronger dollar — the same copper at 9,000 dollars costs 8,571 euro per tonne: 4.8% more, without the LME having moved. If the rate rises to 1.15, the price falls to 7,826 euro. The rule to remember: strong dollar, expensive metal in euro; weak dollar, cheaper metal in euro. The euro price is therefore the product of two markets, and the euro chart can tell a different story from the dollar chart.
The dollar and metals: the inverse relationship
Historically, dollar prices of commodities tend to move in the opposite direction to the dollar: when the American currency weakens, dollar-quoted metals become cheaper for buyers in other currencies, demand holds up and quotations rise; when the dollar strengthens the opposite happens. The relationship is not a law — there are periods when the dollar and metals rise together, for example when the rally is driven by Chinese demand — but it is persistent enough to matter.
For a euro buyer the effect is a partial natural hedge: a weaker dollar lowers the cost of the exchange rate but tends to raise the quotation, and vice versa, so that the euro price often fluctuates less than the dollar price. It is one of the reasons why it pays to look at the metal chart in euro and not only in dollars, and why hedging decisions should be taken on the price actually paid.
The exchange-rate clause in contracts
A contract indexed to the LME must establish, besides the reference period of the price, the rate at which the dollar price becomes a euro price. The consistent choices are two: use the LME fixing of the same day or the same period as the price, or the ECB reference rate of the same day or its average of the same month. What matters is that price and rate refer to the same period: an October average price converted at the rate of a day in November introduces a risk neither party has chosen.
It is worth writing down the source and the rounding too: "ECB reference rate published on day X", "LME fixing of the day of the Official price", four decimals. And remembering that the ECB rate comes out in the afternoon, after the morning Official prices: anyone computing the euro price in real time uses the LME fixing or the spot rate, and settles up afterwards.
Hedging currency risk
Currency risk is managed separately from metal price risk, with its own instruments. The forward contract fixes today the rate at which a dollar amount will be converted at a future date: the cost is embedded in the forward points, which depend on the difference between dollar and euro interest rates. Options give the right, not the obligation, to convert at a predetermined rate, in exchange for a premium. FT Mercati publishes euro-dollar forward rates up to ten years precisely for this use.
A practical principle: align the maturity of the hedge with the quotational period of the metal. If the copper price of an order is fixed on the December LME average, the rate to hedge is December's. Hedging the metal and not the currency — or the reverse — leaves half of the risk open.
Exchange rates and metals on FT Mercati
On the FT Mercati platform LME prices are available in dollars and in euro, converted at the LME fixing of the day, alongside spot quotations of the main currencies, ECB reference rates with their history and forward rates. The Milan Indexes are already expressed in euro and incorporate the Italian market premiums.
The historical series of exchange rates — including official monthly averages — are also part of the fundamental data, together with the BIS effective exchange rates that measure the strength of a currency against the basket of its trading partners. The Currency exchange rates page of the site gives an overview of the service.
Frequently asked questions
How is an LME price converted into euro?
By dividing the dollar price per tonne by the euro-dollar rate: with copper at 9,000 dollars and the rate at 1.10 the price is 8,182 euro per tonne. A lower rate (stronger dollar) gives a higher euro price, and vice versa.
Which rate does FT Mercati use for euro prices?
The LME fixing of the day, i.e. the rate the exchange records concurrently with the Official prices and uses for its own euro quotations: it is the rate consistent over time with the price. The ECB reference rate, with its history, is available separately.
At what time is the ECB reference rate published?
Once a day, at around 16:00 CET, based on the concertation procedure between central banks at 14:10 CET. It therefore comes out after the formation of the morning LME Official prices: for a real-time calculation one uses the LME fixing or the spot rate.
Why do metals rise when the dollar weakens?
Because metals are quoted in dollars: a weaker dollar makes them cheaper for buyers in other currencies and supports demand. It is a historical tendency, not a rule: when the rally is driven by physical demand, the dollar and metals can rise together.
Do I need to hedge the exchange rate if I have already hedged the metal price?
They are two distinct risks. A hedge on the LME price fixes the dollars per tonne, not the euro: if the rate moves, the euro cost changes anyway. The exchange rate is hedged with forwards or options, with a maturity aligned to the quotational period of the metal.
What should the exchange-rate clause of a contract say?
Which rate (LME fixing or ECB reference), of which day or period (the same as the price: the day of the Official price or the average of the same month), the source and the rounding. Price and rate must refer to the same period.
Sources
References for this guide:
- ECB — euro foreign exchange reference rates
- LME — reference prices
- BIS — effective exchange rates
- FT Mercati — Currency exchange rates
This guide is for market information purposes and does not constitute financial advice: hedging decisions should be taken with your own advisers and your bank. The numbers in the examples are illustrative and do not represent current quotations.