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.

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.

• 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

Designing the hedge step by step

1. Map the contract: tonnes, Cu%, Au/Ag g/t, moisture, payabilities, TC/RC terms, penalties, pricing currency, QP, and who picks QP.
2. Translate to exposures: payable Cu tonnes on a QP average, plus payable Au/Ag, plus FX, plus freight if you carry it.
3. Choose the proxies: LME copper for QP average, COMEX or OTC for Au/Ag, FX forwards, FFAs if needed.
4. 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.
5. 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.
6. Book the credits: buy Au/Ag puts or sell forwards against provisional payable ounces. Keep size flexible for assay finalization.
7. Confirm and monitor: daily position report: physical vs paper by month, location, and currency. Roll hedges as laycan or QP moves.
8. 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

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.

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.