Variable Pricing Clause – Aluminum Linked to LME

Intro:

Applicable where the final unit price is to be determined based on London Metal Exchange (LME) quotations around the shipment date. The following clause ensures price calculation is objective, documentary evidence is provided, and the maximum price cap is observed.

QUESTION

Dear Mr. Old Man,

Hope you are doing well.

Need your guidance in regard to LC Issuance for Aluminum and subjected to LME (London Metal Exchange) and unit price subject to changes upon shipment. How should we issue such LC?

Thank you.

Ms. Woo

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ANSWER

Dear Ms. Woo,

The London Metal Exchange (LME) is the virtual ring where the daily battle for aluminum prices takes place. Buyers and sellers wager on the future value of the metal, and from this tug-of-war emerges the next day’s reference price.

Of course, the price is not determined solely by supply and demand. Other factors can also influence the final figure. It is quite common for sales contracts—and consequently the LCs—to stipulate that the final price will be fixed at the time of shipment, often based on benchmark data from organizations such as the LME, as in your case.

While I am not deeply familiar with the detailed mechanics of aluminum pricing under the LME system, my suggestion is to translate the pricing method in your sales contract directly into the LC terms, with clear provisions for both price calculation and documentary evidence.

For example, the LC could specify:

“Unit price shall be the average of five LME Official Cash Buyer Prices for aluminum, as published by the London Metal Exchange, taken on the bill of lading date, two days prior, and two days following. If no quotation exists on the bill of lading date, the two prior and two subsequent quotations shall be used instead.

Beneficiary must present a copy of the LME price list for each of the relevant dates, issued by or on behalf of the London Metal Exchange, together with the commercial invoice showing the calculation.

Unit price shall in no case exceed USD 2,580 per metric ton.”

This way, the issuing bank can objectively verify the final price based on an independent source, while the LC remains consistent with the contract and protects the applicant from price spikes beyond the agreed ceiling.

Best regards,

Mr. Old Man