How to Hedge Metals That Aren’t on LME or CME
Not every metal trades on-screen. Concentrates, intermediates, and specialty grades live in contract land, not in tidy exchange lots. You still have price risk. The fix is a proxy hedge that tracks the value driver and a set of controls for the messy bits you cannot hedge directly. We’ll use copper concentrate
as the template, but the approach works for other off-exchange materials.
Bottom line:
hedge the contained and payable
metals with listed contracts, lock the quotational period, and ring-fence the rest with contract terms, options, and back-to-back physicals. If you skip this, basis risk will eat your margin.
How the cash price is actually built
Copper concentrate is priced off the exchange copper price on an average over a quotational period (QP)
plus or minus treatment and refining charges (TC/RC), minus penalties, plus credits for by-products. In plain English: take the metal price, average it over the agreed month(s), then apply the contract math.
Simplified formula (illustrative):
Payable value = [Payable Cu (t) × Avg Cu price over QP] − [TC (USD/dmt) + RC (USD/t payable Cu)] − penalties + by-product credits
where Payable Cu (t) = Dry tonnes × (Cu% × payability − deductions)
- QP:
month of shipment, M+1, M+2, arrival month, or a buyer’s option window.
- Payability:
contract percentage of contained metals that are “paid.”
- TC/RC:
fees to turn concentrate into refined metal. Often negotiated vs benchmarks.
- Penalties:
deductions for impurities (As, Bi, Pb, Hg, etc.).
- Credits:
gold and silver content gets paid and should be hedged too.
Where your P&L actually moves
| Exposure |
What it is |
Hedge tool |
Reality check |
| Copper price (QP average) |
Average of LME/COMEX over the QP |
LME or COMEX copper futures strip; LME Monthly Average Futures; average-price options (TAPOs/APOs) |
Use a calendar strip matching the QP. Roll as shipment/QP shifts. |
| Gold & silver credits |
Payable Au/Ag in the conc |
COMEX/LBMA futures or OTC forwards |
Hedge provisional assays. True-up after final assays. |
| FX |
USD sale vs local costs |
FX forwards or options |
Line up with the pricing and payment dates. |
| Freight |
Voyage cost on water |
FFAs on the relevant route; bunker fuel swaps |
Only hedge if freight isn’t passed through. |
| TC/RC levels |
Benchmark vs spot vs negotiated |
Back-to-back contracts; portfolio offset; bespoke OTC where available |
Market instruments are thin. Manage by contract and book structure. |
| Assay and moisture |
Provisional vs final assays; dmt vs wmt |
Operational controls, umpire lab clauses, reserves |
Not hedgeable. Control it in the contract and logistics. |
| Impurity penalties |
As, Pb, Bi, etc. |
Sourcing and blending strategy; counterparty selection |
Commercial problem, not a futures problem. |
Designing the hedge step by step
- Map the contract:
tonnes, Cu%, Au/Ag g/t, moisture, payabilities, TC/RC terms, penalties, pricing currency, QP, and who picks QP.
- Translate to exposures:
payable Cu tonnes on a QP average, plus payable Au/Ag, plus FX, plus freight if you carry it.
- Choose the proxies:
LME copper for QP average, COMEX or OTC for Au/Ag, FX forwards, FFAs if needed.
- Build the strip:
if QP is M+2, sell LME monthly average futures in M+2 for the payable Cu tonnage. If QP is an arrival window, use a rolling strip and adjust when QP is set.
- Cover optionality:
if the buyer can choose the QP (e.g., any one of M, M+1, or M+2), layer average-price options
to cap the cost of rolling the hedge.
- Book the credits:
buy Au/Ag puts or sell forwards against provisional payable ounces. Keep size flexible for assay finalization.
- Confirm and monitor:
daily position report: physical vs paper by month, location, and currency. Roll hedges as laycan or QP moves.
- Close the loop:
when provisional pricing is invoiced, match off the paper. Re-mark after final assays and settle deltas.
Worked example: one cargo, clean hedge
Assume:
10,000 wmt Cu conc, 10% moisture ⇒ 9,000 dmt. Cu grade 25.0%. Payable Cu = contract payability on contained Cu. QP = M+2 average of LME official. TC in USD/dmt and RC in USD/t payable Cu. Gold 1.5 g/t and silver 40 g/t with standard payabilities.
Hedge:
sell LME copper monthly average futures for month M+2 sized to the payable Cu tonnes. Buy COMEX gold and silver forwards against provisional payable ounces. Place an FX forward for USD receipts if costs are in local currency. If freight is your risk, book an FFA strip on the voyage route. Keep a TAPO collar if buyer holds QP optionality across M+1/M+2 to cap roll risk.
What you still cannot neutralize with futures
- TC/RC drift:
there is no deep, public TC/RC futures market. Use back-to-back sales, portfolio offsets, or pre-agreed adjusters.
- Assay shifts and impurities:
manage with strict sampling protocols, umpire lab selection, and quality covenants.
- Operational slippage:
late vessels and laycan changes. Keep hedge governance tight and rolls pre-approved.
Control framework that stops the bleeding
- Hedge policy:
define what gets hedged, when, and with which instrument. No ad-hoc punts.
- Lot sizing rules:
match payable metal, not contained metal. Round to exchange lots and document residual exposure.
- Daily P&L and exposure report:
by contract, by month, by location. Paper equals physical or there is a written reason.
- QP governance:
who decides, when, and how it is communicated. If counterparty has the option, price the optionality.
- Credit and margin lines:
futures variation margin kills weak desks. Set limits and stress scenarios.
Need a plug-and-play hedge setup for concentrates?
We build QP-matched strips, option overlays, and reporting packs for copper concentrates and other off-exchange materials.
Request a Proposal
Quick reference
- Hedge the QP average with LME monthly average futures or a futures strip. Options help if QP can move.
- Size your hedge to payable
metals, not contained metals.
- Hedge Au/Ag credits separately. Keep room for assay true-ups.
- TC/RC, penalties, and quality are commercial risks. Control them in the contract and sourcing, not on a screen.
- Report daily and roll early. Last-minute rolls cost money.
This content targets professional operators. Hedging involves market risk, liquidity risk, and margin calls. Use documented limits, confirmations, and pre-approved brokers before you place trades.