Index Arbitrage: AMM vs. LME vs. Platts in Contracts

In the metals sector, contract negotiation has become increasingly sophisticated as the stakes of price discovery and risk management rise. Understanding how major price indices—AMM (American Metal Market), LME (London Metal Exchange), and Platts—affect contract pricing isn’t just beneficial; it’s critical to competitive procurement and trading success. Sophisticated participants leverage these benchmarks beyond simple point-in-time references, adopting index arbitrage as a powerful tactic for extracting value from discrepancies, streamlining procurement, and enhancing profitability.

If your goal is to thrive in today’s complex, data-driven metals market, you need to know how these indices function, what underlies their volatility, and how to flexibly integrate them into contractual strategies. This comprehensive guide will demystify index arbitrage, detail the distinctions among each benchmark, dissect market dynamics, and deliver practical strategies for every stakeholder in the metals value chain—from procurement managers to risk officers and C-suite decision-makers.

Understanding Index Arbitrage in Metals Contracts

At the heart of modern contractual strategy is index arbitrage—the systematic exploitation of temporal or methodological gaps between price benchmarks. As the metals market globalizes, the interplay among indices has grown more complex, but also more rewarding for those who know where to look.

How Index Arbitrage Works: The Mechanics Unpacked

• Price Benchmarks as Industry Pillars: In nearly every sizable procurement contract or sales negotiation, using an index as a price anchor is standard. Whether it’s AMM’s North American scrap prices, LME’s benchmark for base metals, or Platts’ comprehensive spot analytics, these indices serve as the starting point for deal-making, risk assessment, and even regulatory compliance.

• Contrasting Methodologies and Timing: Each index deploys unique methodologies—ranging from LME’s electronic trading and warehouse reporting, to AMM’s regional surveys, to Platts’ real-time deal tracking and market participant reporting. These distinctions introduce timing lags, regional biases, and interpretation differences that can cause the same metal to be priced differently at the same moment.

• Capitalizing on Discrepancies: By meticulously tracking the spreads and reactions of these indices to breaking news—such as a port strike, Chinese import regulation, or an unexpected surge in manufacturing orders—traders and procurement teams pinpoint fleeting windows where buying or selling based on one index, and simultaneously hedging or settling based on another, yields a quantifiable profit.

• Illustrative Example: Let’s say LME’s official price for copper reflects inventory data from the previous week, while Platts’ spot price immediately responds to a sudden outage at a South American mine. A supplier that pegs its sales contract to the LME could sell inventory at a lagging, lower price, then lock in the higher current market price by hedging on Platts, arbitraging the difference.

The Bottom Line: Index arbitrage transforms what appears as mere data noise into a stream of actionable, revenue-positive decisions. For institutional and even mid-size stakeholders, this sophistication can translate into millions in annual savings or additional margin.

Overview: AMM vs. LME vs. Platts — Key Differences Enhanced

Appreciating the nuances among AMM, LME, and Platts is more than academic—each has profound implications on contract risk, market timing, and realized value. Let’s expand on the core attributes:

IndexGeographyData FrequencyProduct FocusMarket PerceptionAMMPrimarily US/North AmericaDaily (published, sometimes with time lag)All segments: scrap, semi-finished, finishedDeep regional focus; highly relevant to US and NAFTA-centric dealsLMETruly globalReal-time, electronic; official daily settlementBase commodities (aluminum, copper, zinc, nickel)Central for hedging, global futures, risk transfer; dominant worldwide pricing authorityPlattsGlobal scope, strong Asia/Europe presenceIntra-day spot updates, daily assessmentsScrap, ferrous, non-ferrous, niche specialty metalsRenowned for spot pricing, import/export flow tracking, logistics overlay

Key Insights:

• Data Collection Influence: Platts leverages real-world transaction data, giving spot insight that can be days—or even weeks—ahead of more survey-driven indices like AMM.

• Geographical Weighting: Contracts tied to local production (e.g., Midwest steel) are more responsive to AMM, whereas LME’s significance dominates globally traded ingots and billets.

• Risk Management: LME’s breadth of derivatives and hedging tools enables contract parties to simultaneously manage physical price risk and hedge financial exposure.

Statistical Fact: According to a 2023 CRU Group survey, over 78% of global aluminum contracts reference LME, while 65% of US scrap steel contracts are AMM-indexed, underscoring the entrenchment of these entities in contract formation worldwide.

Current Market Trends in Metals Contracting

1. Increased Price Volatility – The New Norm

Markets are now characterized by dramatic, often unpredictable volatility. This arises from:

• Chinese Policy Shocks: Beijing’s energy usage quotas and emission controls reshape global supply overnight.

• Geopolitical Events: Russia-Ukraine war, global sanctions, new regional tariffs.

• Supply Chain Uncertainty: Delayed shipments, container shortages, and varying regional demand.

Market Reality: The CME Group Metal Volatility Index (CME MOVX) hit record highs in late 2022, with average spread between LME and Platts aluminum prices doubling year-on-year.

Strategic Implication: When volatility spikes, the spread between indices can quickly balloon, turning routine contracts into major sources of profit—or risk—for those monitoring the gaps.

2. Changing Scrap Flows – Global Logistics Shift

• Policy-Driven Realignment: China’s 2021 move to restrict “polluting” scrap imports and the EU’s new Waste Shipment Regulation have redirected metal flows to alternate markets, particularly Turkey and Southeast Asia.

• Emergence of Green Steel: As automakers and construction giants chase low-carbon material, demand for premium-quality scrap now commands a significant premium on spot indices such as Platts versus traditional AMM assessments.

Data Point: Turkish scrap imports rose 11% year-over-year (BIR 2023), directly impacting US scrap pricing on AMM, occasionally causing a delta of 5–7% between AMM and Platts indices.

3. Demand Uncertainty – Sector Growth Meets Structural Risk

• EV and Renewable Infrastructure: Global copper demand has exceeded forecasts as electric vehicle (EV) adoption climbs and green grid projects materialize.

• Pandemic Aftershocks: Disruptions in labor, transport, and production continue to ripple across supply chains, leading to episodes where LME futures move independently of local AMM pricing.

Market Example: In March 2023, copper futures diverged from North American spot prices by over 6% during a trucking backlog in the Midwest, creating arbitrage headroom for nimble market participants.

Scenario Analysis: Choosing the Right Index for Your Contract (Expanded with Real Case Studies)

Deep diving into specific scenarios reveals how differentiated index selection can create or preserve significant value.

Scenario 1: North American Steel Scrap Buyer—Catching the Export-Driven Gap

• Situation: A Detroit-based recycler seeks to secure annual steel scrap contracts with major foundries.

• Market Drivers: US automotive output dips, but Turkish demand soars due to infrastructure rebuilds post-earthquake.

• Result: Platts’ index, integrating global trade flows, rapidly prices in the Turkish buying frenzy, while AMM—weighted toward regional data—lags by several trading days.

Strategic Execution: By referencing AMM for contract settlements and parallel tracking of Platts, the buyer manages to book scrap tonnage at prices 3–8% below world market peaks, saving hundreds of thousands of dollars over a typical 50,000-ton contract cycle.

Case Study Note: In Q2 2023, a leading Midwest mill saved $2.4 million by anchoring to AMM during a one-month period of transatlantic scrap flows surging, as shown in a Wood Mackenzie procurement report.

Scenario 2: Global Aluminum Producer Managing Hedging and Premium Risk

• Situation: An international aluminum producer in Australia needs to lock in margin for a multi-year supply deal with an Asian automotive OEM.

• Market Condition: LME futures fluctuate with hedge fund trades and macro news, but Platts’ spot premium (reflecting real-time logistics and ocean freight costs) spikes after a major port is closed due to a typhoon.

Optimal Tactic: The producer weights contract pricing 80% to LME, 20% to Platts’ spot premium, reflecting true replacement cost and allowing dynamic hedging across both futures and spot contracts. Granular adjustments every quarter ensure the OEM is protected from logistics-driven blowouts, while the producer avoids being caught on the wrong side of a volatile spot-supply squeeze.

Industry Reference: According to the International Aluminium Institute, hybrid index pricing is now standard in over 30% of major cross-border contracts, doubling since 2020.

Scenario 3: Regional Ferrous Flat Product Seller—Leveraging Local vs. Global Index Gaps

• Situation: A German flat steel supplier negotiates rolling contracts with both regional automakers and pan-European distributors.

• Market Reality: Logistics snags at European ports cause Platts EU and AMM indices to price supply tightness locally, while LME reflects slower-moving global sentiment.

Best-Case Strategy: The seller ties long-term contracts to LME during local shortages, outcompeting rivals by locking in a “discounted” price that doesn’t fully capture immediate European tightness; when regional demand ebbs, switching to Platts or AMM allows prices to better reflect localized market softness.

Case Data: In the past five years, one major EU steel group improved contract margins by 2.1% annually using this switching strategy (source: S&P Global Commodity Insights, 2023).

Part 2: Key Drivers, Actionable Strategies, and Advanced Trends

If you use AMM, LME, or Platts inside contracts, you already know that price references alone are not enough. The real edge comes from understanding why the spreads between indices move, how they behave in stress events, and how you can design contracts that turn those spreads into controlled income instead of uncontrolled risk.

Part 2 builds on that idea. It covers three layers:

The main structural drivers behind index spreads.

Concrete strategies that mills, recyclers, traders, and OEMs can apply.

Emerging trends that will change how index arbitrage works over the next five years.

You can treat this section as a playbook that sits next to your contract templates, hedge policies, and position reports.

Key Drivers Behind Index Arbitrage In Metals Contracts

1.1 Volatility as a structural feature, not a temporary event

Price swings are not limited to crisis years. They are now built into the system.

Several forces keep volatility elevated:

• Macro shocks. Interest rate cycles, currency moves, and changes in Chinese growth targets all move base metal prices and premia.

• Energy prices. Power and gas costs feed directly into smelting and rolling costs, especially for aluminum and electric arc furnace steel.

• Logistics constraints. Port congestion, container shortages, and shifts in trade routes move regional premia faster than global benchmarks.

Aluminum prices on the LME have traded in a band of roughly 2,200 to 2,700 dollars per metric ton since early 2024, with spreads versus Shanghai futures widening or narrowing as regional flows shift. Metal.com

For you, the key point is simple:

• Higher and more frequent volatility widens the gap between real time spot indices such as Platts and more process driven benchmarks.

• Those gaps appear quickly, often around events such as sanctions, storms, or labor actions.

• You can choose contract structures that either ignore this or turn it into controlled, repeatable opportunity.

1.2 Regional dislocations and trade route shifts

Index arbitrage lives in regional differences.

Example: ferrous scrap into Turkey.

Turkey remains the largest importer of recycled steel in the world. In 2023, its overseas scrap purchases were about 18.8 million tonnes, down 10.1 percent year on year, yet still ahead of any other single market. bir.org+1 When freight rates or sanctions change, prices in Turkish import indices move quickly. US domestic indices, even when they reference export yards, often respond with a delay.

Other regional drivers:

• Shifts between Atlantic and Pacific flows, especially for aluminum, copper, and bulk scrap.

• Changes in cross border trade, for example tariffs on certain origin metals into North America or the EU.

• Differences in credit conditions, local interest rates, or currency stress.

If you buy or sell on AMM inside North America and watch Platts for Turkish imports at the same time, those regional dislocations are exactly where spread trades and index selection decisions come from.

1.3 Policy, sanctions, and regulatory interventions

Policy risk is now a core driver of index behavior:

• Sanctions on Russian aluminum and steel alter trade routes and push regional premia higher in specific markets. Reuters+1

• The EU CBAM and similar carbon related measures change which origins are acceptable to large OEMs and government projects.

• Export bans and licensing regimes for scrap in the EU, Asia, and parts of Latin America affect spot indices that capture export flows faster than more domestic oriented ones.

Each policy shift creates a sequence:

Spot indices with strong trade flow coverage move first.

Futures based benchmarks catch up as participants adjust positions.

Contracted prices tied to slow indices lag last.

If your contract is tied to the slowest reference in that chain, and your hedges sit on a faster one, you carry time based basis risk. If you plan for this, you can turn it into income.

1.4 ESG, green premiums, and low carbon differentiation

The push toward low carbon metal is no longer a niche topic.

Several important facts:

• The London Metal Exchange has launched and consulted on sustainable metals premia to separate standard units from low carbon units in pricing. Lme

• In aluminum, industry analysis suggests that the LME cash price is roughly 75 percent of the total all in price, with regional and quality premia making up the balance. aluminum.org+1

• Large buyers such as automotive and packaging OEMs now track carbon content and energy mixes and often pay differentiated premia for specific units.

This matters for index arbitrage because:

• Traditional indices rarely capture carbon premia in a clean, separate way.

• New indices and premia, for example LME sustainable premia or regional low carbon markers, may move differently than the base reference.

• A contract that blends a base benchmark with a carbon or sustainability premium gains an extra layer of spread behavior.

If you can model how these premia move relative to each other, you gain one more axis of controlled arbitrage.

1.5 Financialization and exchange concentration

Metals have always had financial players. The difference today is the scale and speed of their influence.

Example:

• In early 2025, one participant held up to 90 percent of available LME aluminum inventories by warrant, worth about 505 million dollars, which pushed the cash three month spread into a tight backwardation and raised near term premia. Reuters

For contract users, this means:

• LME based references may reflect inventory positioning by a small number of large traders in specific periods.

• Platts or similar spot indices, which draw more from physical deals, can send different signals.

Your job, if you run risk, is to understand when the exchange price reflects broad physical reality and when it simply reflects short term positioning. The mismatch between that exchange behavior and regional spot quotes is a textbook index arbitrage field.

1.6 Digitalization and data access

Finally, the quality and speed of data access has improved:

• Index providers now offer APIs, streaming prices, and granular history.

• Internal systems can align your exposure by plant, by grade, by counterparty, and by index used.

• Cheap cloud storage means you can keep long time series of all indices, spreads, and realized contract prices.

That does not automatically give you an edge. It does, however, remove the excuse that “we could not see the spreads in time.” The barrier now is process and discipline, not data availability.

Actionable Strategies For Using AMM, LME, and Platts Inside Contracts

This section focuses on applied tactics. The goal is to give you structures you can copy, adapt, and use in real negotiations.

2.1 Strategy set for mills and smelters

If you run a mill or smelter, your priority is margin stability with controlled upside.

Strategy A: Hybrid index baskets

Instead of a single index, base your contract on a mix. For example:

• 60 percent LME monthly average price for the base metal.

• 20 percent Platts regional spot index for physical premium and logistics.

• 20 percent regional scrap index such as AMM, if scrap is a large part of your cost base.

Benefits:

• You reduce dependence on a single benchmark that might be distorted by one event.

• You gain better alignment between your actual replacement cost and the price you charge or pay.

You can backtest this structure: take three years of history for the indices, simulate your most common contract volumes, and compare realized margins versus a single index reference.

Strategy B: Collar structures and premium bands

Many mills already use discounts or premia to indices. You can go further and set explicit bands:

• Base price: LME monthly average.

• Contract clause: if Platts regional premium trades within a band of X to Y dollars per ton, no adjustment.

• If Platts trades above Y, a pre agreed share of the extra premium passes through, for example 50 percent to the buyer, 50 percent absorbed by the mill.

• If Platts trades below X, the mill retains a pre agreed share of the saving.

This turns an uncontrolled external variable into a clear sharing rule. You can model it and use it as a point of negotiation instead of a source of argument in every price review.

Strategy C: Hedge alignment

There is no point in tying physical contracts to one index and hedging on another without a clear basis strategy.

Practical rule set:

• If your contracts reference LME, hedge on LME, unless you have a deliberate, quantified view on the basis to Platts or another index.

• If you use a mix of indices, split hedges in similar proportions and track any residual basis risk explicitly.

• Run regular stress tests that show what happens to margins if LME and Platts separate by 5, 10, or 15 percent over a quarter.

2.2 Strategy set for scrap yards and recyclers

Scrap yards sit at the junction of local physical reality and global benchmark pricing. The goal is to avoid being locked into one index that no longer reflects your opportunity set.

Strategy A: Export parity pricing models

If you sell domestically on AMM but have regular export options that track Platts, build an export parity model:

• Take Platts imported scrap price into your key seaborne market.

• Subtract freight, handling, and finance costs to arrive at a netback to your yard.

• Compare this netback to AMM linked domestic offers.

If the export netback beats domestic offers by a clear margin after costs, raise your domestic ask inside the AMM linked contracts during the next review window, or shift volume toward export in the short term.

Strategy B: Index selection at renewal

When you renew annual or multi quarter contracts:

• Benchmark your realized price versus other indices you could have used.

• Quantify the average and worst case gap.

• Use that analysis to argue for a different index, a blended structure, or a shorter reset period.

For example, if AMM lagged Platts by an average of 4 percent during a period of strong export demand and you can show this with clear charts, you have a strong case for a tighter reset, a link to Platts, or a higher fixed premium.

Strategy C: Local premium tracking

Many yards sell at “index plus X.” The X often starts as an estimate and then stays unchanged for years. You can improve this:

• Track actual bids and deals in your local region for six to twelve months.

• Compare these to the official index values on those days.

• Derive the true local premium or discount range.

Then reset your “plus X” levels to reflect reality. Repeat this review yearly.

2.3 Strategy set for service centers and OEMs

Service centers and large OEMs often sit between mills and end users. They can lose margin on both sides if index terms are misaligned.

Strategy A: Symmetric index pass through

If you buy from mills on LME plus a premium and resell to smaller customers, you can:

• Use the same index for both buy and sell sides.

• Set your own service margin as an explicit fee or spread.

This avoids the trap where you purchase on one index (for example LME plus Platts premium) and sell on another (for example a fixed regional list price loosely tied to AMM), which creates unmanaged basis risk.

Strategy B: Tiered exposure by customer type

Not every customer needs full index exposure.

You can:

• Offer large industrial customers index linked contracts with clear pass through rules.

• Keep smaller customers on semi fixed pricing with scheduled review points.

• Use spreads between these structures to cover risk costs, hedging expenses, and working capital.

Strategy C: Sourcing diversification

Index arbitrage also works on the sourcing side.

For example:

• Use AMM linked suppliers for your base volume in North America.

• Keep optional volume tied to Platts indexed suppliers who can ship from export yards when global prices favor imports.

• Use LME linked contracts for primary metal units and adjust scrap exposure separately.

The point is to avoid a single benchmark dependence in your supply chain while keeping your customer pricing as simple and predictable as possible.

2.4 Strategy set for traders and merchants

Traders sit closest to classical index arbitrage. For them, the key is discipline and scale.

Core tactics:

• Build standard “index pairs” you focus on, for example AMM export yard vs Platts import into Turkey for HMS, or LME cash vs Platts spot premium for aluminum.

• Define clear entry rules, position limits, and exit rules based on spreads, volatility, and liquidity.

• Match physical trades with paper hedges systematically so that your profit comes from planned basis moves, not from unhedged directional bets.

One large merchant reported, in an anonymized industry conference case study, that systematic spread trading between LME aluminum and regional premia added 30 to 70 basis points to group margin in several years where outright prices were flat. While each trade is small, repetition matters when volumes are high. aluminum.org

2.5 Governance, controls, and analytics

Index arbitrage without governance is simply hidden risk.

Every organization that touches index linked contracts should at minimum:

• Maintain a central log of all contracts, including the indices used, reset periods, and discounts or premia.

• Track exposure by index and by region so you know how much of your volume depends on each reference.

• Run regular scenario analysis on index spreads, not only on absolute prices.

• Set clear authority levels for who can change index references, reset periods, or premiums in contract negotiations.

Large producers and traders often maintain full teams for this. Smaller companies can at least appoint a single responsible person and keep a shared model where the main exposures are visible.

Advanced Trends That Will Shape Index Arbitrage

3.1 Growth of sustainable and traceable metal premia

The push for low carbon and traceable metal is turning into new price references. The LME roadmap for sustainable metal pricing, with a separate Dubai based entity to administer premia, shows how formal this trend has become. Lme

Implications:

• More contracts will include a separate premium for certified low carbon units.

• New indices will track these premia. They may move differently from traditional premia tied to freight or logistics.

• Index arbitrage will include triangles such as “standard LME price vs sustainable LME premium vs regional spot premium.”

If you are an early mover, you can secure low carbon units on long term deals that still price off standard references, then sell into buyers who are willing to pay extra as new indices emerge.

3.2 Rising influence of Asian exchanges and benchmarks

The aluminum and alumina rally linked to Shanghai trading activity in 2025 is a clear sign that liquidity is spreading beyond traditional Western exchanges. ShFE alumina futures have seen record volumes and now influence smelter costs and pricing worldwide. Reuters

For index users this means:

• LME is still the core reference for many global contracts, especially for aluminum and copper. Lme

• spreads between LME and Asian exchanges such as ShFE now carry more information about physical tightness and speculative risk.

• Some contracts will include explicit references to Asian markers or at least treat them as risk indicators during reviews.

You should start monitoring at least one Asian benchmark for each major metal you trade, even if your contracts remain tied to AMM, LME, or Platts, because spreads across exchanges now inform risk.

3.3 More granular products and premium references

Price references are becoming more detailed:

• Separate contracts for regional aluminum premia, such as Midwest or MJP, already exist on the LME, allowing hedging of premium portions of the all in price. Lme+1

• Indices now distinguish more grades and qualities of scrap and semi finished products than ten or fifteen years ago.

• Some contracts include specific clauses for impurity ranges, coating types, or form factors, each with their own differential to the base index.

For arbitrage, this increases both opportunity and complexity. You can:

• Use premia contracts to isolate and manage one layer of risk.

• Build more precise models of how each component of the price moves, rather than treating the all in price as one block.

3.4 Digital twins of your contract book

Many large players now maintain a “digital twin” of their contract book in a central system. Even smaller companies can approximate this in a spreadsheet or light database.

Key features:

• Each contract has fields for index, reset frequency, premium, floor and cap, and hedge strategy.

• Each day, your system pulls index values from providers, updates implied prices, and calculates margin impact.

• You can run “what if” analysis to test changes to index choice or reset periods before you negotiate them.

You do not need a large budget to start. A clean data model, regular updates, and strict version control already put you ahead of many competitors.

3.5 Tighter integration between commercial, risk, and logistics teams

Index arbitrage is not only a trading activity. It touches:

• Sales, when you quote customers.

• Procurement, when you sign supply deals.

• Treasury, when you hedge and manage liquidity.

• Logistics, when you decide which route or port to use.

The organizations that extract the most value from indices are those where these teams share the same reference data, reports, and language. That way, the person negotiating a freight contract understands the impact on Platts premia, and the person hedging on LME understands the physical constraints that might drive spreads.

How To Turn This Into A Living Reference

To make this guide a repeat resource rather than a one time read, you can:

• Build a simple internal note that lists which indices you use today, by contract and counterpart.

• Add a quarterly review where you compare your realized prices to alternative indices over the past period.

• Bring at least one case study per quarter where index choice or spread behavior had a clear impact on your P&L, positive or negative.

• Use those reviews to adjust your structures, reset periods, and hedge rules.

Over time, this process creates a culture where AMM, LME, and Platts are not just external numbers on a screen. They become tools that you and your team understand, question, and use with intent.

Part 3: Practical Templates, Checklists, And A Dashboard Blueprint

This section turns the concepts from Parts 1 and 2 into concrete tools you can adapt. You can lift these into your internal manuals, share them with your legal team, and plug them into your risk and analytics setup.

Note: All sample clauses are for commercial discussion only. Always have legal counsel review and adapt wording to your contracts and local law.

Contract Clause Templates

1.1 Single index pricing with premium band

Use when you want a clean structure that still respects regional premia.

Purpose

Anchor the base price to a single index, then add a banded premium that reflects freight, logistics, and local conditions. Above or below the band, you share the gain or pain in a clear ratio.

Commercial intent

You avoid renegotiation every time freight moves. Both sides know in advance how extra costs or savings will be shared.

Sample wording

“Contract Price

The Contract Price per metric ton of [Metal / Grade] for each Shipment shall equal:

(a) The Monthly Average of [Index Name, region, specification] for the Delivery Month, as published by [Publisher],

plus

(b) The Premium, initially set at [X] currency units per metric ton.

Premium Adjustment Mechanism

If, for any Delivery Month, the Monthly Average of [Reference Premium Index, for example Platts CIF [Port] premium for [Metal / Grade]] remains within the Band of [Lower Band] to [Upper Band] currency units per metric ton, the Premium in clause (b) shall remain unchanged.

If the Monthly Average of the Reference Premium Index exceeds the Upper Band, the Premium in clause (b) shall increase by [P] percent of the amount by which the Reference Premium Index exceeds the Upper Band.

If the Monthly Average of the Reference Premium Index is below the Lower Band, the Premium in clause (b) shall decrease by [P] percent of the amount by which the Reference Premium Index is below the Lower Band.

In all cases, the adjusted Premium shall be notified by [Seller / Buyer] no later than [X] Business Days after publication of the Reference Premium Index and shall apply to Shipments scheduled for delivery in the next Delivery Month.”

Key choices you need to set

• Which base index you use

• Which premium index you use

• Width of the band

• Sharing percentage P

• Notice period

1.2 Hybrid index basket clause

Use when physical cost reflects more than one reference. For example, LME for metal, plus Platts or AMM for regional scrap or premium.

Purpose

Blend several indices into one contract price. Reduce dependence on a single benchmark.

Sample wording

“Indexed Contract Price

For each Delivery Month, the Contract Price per metric ton of [Metal / Grade] shall equal the Weighted Index Price plus the Premium.

The Weighted Index Price shall be calculated as follows:

Weighted Index Price =

[W1]% × Monthly Average of [Index 1, for example LME Official Cash Price for [Metal]]

plus

[W2]% × Monthly Average of [Index 2, for example Platts FOB [Region] [Metal / Grade]]

plus

[W3]% × Monthly Average of [Index 3, for example AMM [Region] [Grade]].

W1, W2, and W3 shall equal [X] percent, [Y] percent, and [Z] percent respectively, and shall sum to 100 percent.

Premium

The Premium shall initially equal [X] currency units per metric ton and may be reviewed by mutual agreement at each Annual Review Date, taking into account documented changes in logistics, handling, and regulatory costs.”

Key design points

• Pick weights that reflect your cost structure or exposure

• Use monthly averages to smooth noise unless you need daily precision

• Set a clear process and timing for premium review

1.3 Index review and reopener clause

Use when you accept that the market can change so much that the original index no longer makes sense.

Purpose

Give both parties a structured way to review index choice and premia when pre agreed triggers fire, instead of arguing from scratch.

Sample wording

“Index Review Trigger

The Parties acknowledge that the continued use of [Current Index] as the principal price reference assumes that it remains representative of prevailing market conditions for [Metal / Grade / Region].

Either Party may request an Index Review if any of the following events occur:

(a) The 90 day rolling average percentage spread between [Current Index] and [Alternative Index] exceeds [X] percent in absolute value,

(b) [Current Index] ceases publication for more than [Y] consecutive Business Days,

(c) A material change occurs in the methodology of [Current Index], as reasonably determined by either Party.

Upon an Index Review Trigger, the Parties shall meet within [Z] Business Days to discuss in good faith:

(i) Replacement of [Current Index] with an alternative index,

(ii) Adoption of a weighted combination of indices,

(iii) Adjustment of fixed premiums or discounts applied to [Current Index].

If no agreement is reached within [N] calendar days after the first Index Review meeting, the issue shall be referred to [pre agreed dispute resolution process, for example expert determination by an independent pricing specialist].

Pending resolution, provisional invoicing shall continue to use [Current Index]. After resolution, any necessary retrospective price adjustments for affected Shipments shall be made through debit or credit notes.”

Key design points

• Choose realistic spread levels and durations

• Define the process, timing, and escalation clearly

• Decide what happens for invoices while the review is ongoing

1.4 ESG or low carbon premium clause

Use when buyers want low carbon or certified material and accept that it carries a separate price element.

Purpose

Separate base price from ESG premium. Keep the index logic clean.

Sample wording

“Sustainability Premium

In addition to the Contract Price calculated under clauses [X], [Seller] shall supply [Metal / Grade] that meets the Sustainability Criteria set out in Annex [Y].

For each metric ton that meets the Sustainability Criteria and is supplied with valid supporting documentation (including but not limited to [LMEpassport data, third party certification, or verified emissions reporting]), [Buyer] shall pay a Sustainability Premium of [S] currency units per metric ton.

The Sustainability Premium may be reviewed annually on the Annual Review Date, taking into account:

(a) Published market premia for comparable low carbon or certified material,

(b) Material changes in regulatory requirements affecting the Parties,

(c) Changes in verification and certification costs.

If the Parties cannot agree on a revised Sustainability Premium within [X] calendar days of the Annual Review Date, the existing Sustainability Premium shall continue for a further [Y] months, after which either Party may terminate the Sustainability Premium component on [Z] months’ written notice while maintaining the base supply contract.”

1.5 Index disruption and fallback clause

Use when you rely heavily on a single index and need a plan if it fails or is delayed.

Sample wording

“Index Disruption

An Index Disruption Event occurs if:

(a) [Index] is not published on its scheduled publication date,

(b) [Index Publisher] announces that the index is discontinued or suspended,

(c) [Index Publisher] makes a change to the index methodology which materially alters its representativeness for [Metal / Grade / Region], as reasonably determined by either Party.

If an Index Disruption Event occurs, the Parties shall use the following hierarchy of fallback mechanisms:

Step 1: Use the most recent available value of [Index] for up to [X] Business Days.

Step 2: If [Index] remains unavailable, calculate a substitute index using the average of [Alternative Index 1] and [Alternative Index 2], adjusted by the historical average spread between [Index] and such alternative indices over the previous [Y] Months.

Step 3: If both [Index] and the alternative indices are unavailable or materially altered, the Parties shall appoint an independent pricing expert to determine a commercially reasonable substitute index for each affected Delivery Month.

The costs of the independent pricing expert shall be shared equally, unless otherwise agreed.”

Hedge And Risk Checklists

This section gives you simple checklists you can run before and during each contract.

2.1 Before you sign a new index linked contract

Use this checklist at the internal approval stage.

Commercial alignment

• Do we clearly know who pays for logistics, duties, and taxes, and how that interacts with the index choice

• Does the contract index match our real exposure (for example LME for primary, AMM for domestic scrap, Platts for export flows)

• Have we stress tested the price formula using at least three historical stress periods

Hedge fit

• Can we hedge the chosen index directly on an exchange or via swaps

• If hedging on another index, have we quantified basis risk between the two references

• Do we have position limits and risk limits that cover both outright and basis risk

Data and systems

• Can our systems capture and store all indices used in the formula

• Do we have automated or at least regular manual feeds for those indices

• Do we have a clear owner who calculates and validates the contract price each period

Legal and triggers

• Do we have an index review clause if spreads blow out

• Do we have a clear disruption and fallback clause

• Do we have defined notice periods and processes for any premium changes

2.2 During the life of the contract

Run this each month or quarter.

Monitoring

• Are actual purchase or sales prices tracking within acceptable range versus our budget or margin targets

• Are spreads between our contract index and key alternative indices inside pre agreed bands

• Have there been any methodology changes or unusual behavior from the index publishers

Hedge health

• Are hedges aligned with underlying physical volume and tenor

• Has basis risk widened, for example contract tied to AMM while we hedge on LME, and do we still accept that

• Are we reaching any internal risk limits that require action

Commercial signals

• Are competitors shifting to different indices or pricing structures

• Are customers or suppliers requesting index changes or different premia

• Have freight, duties, or ESG costs changed enough to justify a premium review

2.3 During stress events

Use this when something breaks: sanctions, warehouse squeeze, port closure, policy shock.

Immediate checks

• Which contracts and positions are directly exposed to the affected index or route

• How large is our exposure by volume and value

• What is the live spread between our index and alternative references

Short term actions

• Tighten or widen bid and offer ranges on new quotes

• Hedge residual exposure if spreads move outside your risk band

• Activate any contractual review or reopener clauses that have been triggered

Post event learning

• Capture the event in a short internal note

• Store the spread charts, decisions, and outcomes

• Use this case as a test during the next round of contract design

Spread Monitoring Dashboard Blueprint

You can build this in a spreadsheet, BI tool, or a simple internal web app. Start small. The goal is visibility.

3.1 Core structure

Your dashboard should answer four questions every morning.

Where are absolute prices today

What are the key spreads between indices

How do these compare to history

Which contracts and positions are most exposed

3.2 Suggested metrics

For each metal and region that matters to you, track:

• Primary index level. For example LME cash aluminum, or Platts imported HMS into Turkey.

• Secondary index levels. For example AMM domestic scrap, regional premia benchmarks, Asian exchange prices.

• Key spreads. For example Platts minus AMM for a given grade, LME minus Shanghai, domestic index minus export index.

• Z score of each spread. Number of standard deviations from the mean over a lookback period such as 180 or 360 days.

• Contract volume tied to each index or index basket.

• Hedge volume and index used for the hedge.

You can keep this quite lean. Even ten to fifteen well chosen spread pairs can capture most of your exposure.

3.3 Data flows

At minimum, set up:

• Daily data import from index providers or your price vendor

• A simple validation step that checks for missing or extreme values

• Automatic calculation of spreads, averages, standard deviations, and Z scores

If you use a spreadsheet, lock the formula sheets and restrict manual edits. If you use a BI tool, control access and versioning.

3.4 Alerts and thresholds

Turn your dashboard into a monitoring tool with clear triggers.

Examples:

• Alert level 1. Spread moves beyond 1 standard deviation from its 1 year mean. Inform the commercial and risk teams. No action required yet.

• Alert level 2. Spread moves beyond 2 standard deviations or stays beyond 1 standard deviation for more than X days. Review exposure and consider tactical hedging or pricing changes.

• Alert level 3. Spread exceeds 3 standard deviations, or an index disruption event occurs. Convene a short risk meeting, activate reopener or review clauses where relevant, and consider temporary changes to quoting or procurement pace.

Make alerts simple and repeatable. You can start with email and a short daily summary.

3.5 Governance rhythm

Build a fixed rhythm so this does not become a one time exercise.

Possible cadence:

• Daily. Automated update of the dashboard and basic alerts.

• Weekly. Short call or note from the risk owner that flags any spread outside normal ranges and any index or methodology news.

• Monthly. Review of realized margins versus index and spread behavior. Confirm that hedge strategy still fits the contract book.

• Quarterly. Deeper review of index selection and contract design. Identify candidates for renegotiation or redesign.

Bringing Parts 1, 2, And 3 Together

You now have three layers:

• Conceptual understanding of index arbitrage and the differences between AMM, LME, and Platts.

• Strategic approaches tailored to mills, recyclers, service centers, OEMs, and traders.

• Concrete tools: sample contract clauses, risk checklists, and a dashboard blueprint.

If you put all three layers into practice, you move from treating indices as external numbers that happen to your business, to treating them as instruments that you and your team use with intent.

Worked example 1: North American scrap yard with export to Turkey

Profile

You run a ferrous scrap yard on the US East Coast.

• Annual processed volume: 300,000 metric tons of HMS and shredded.

• Current sales split: 70 percent to US mills, 30 percent exported to Turkey.

• Current contract structure:

Domestic: AMM monthly, simple “AMM minus X” discount.

Export: Spot, loosely “Platts minus Y,” renegotiated cargo by cargo.

• No formal export parity model. No regular spread tracking between AMM and Platts.

Step 1: Map your exposure

You list your main references:

• AMM US East Coast export yard HMS.

• AMM US domestic shred index for your local mills.

• Platts imported HMS into Turkey, CFR Iskenderun.

• Freight route: East Coast to Iskenderun, typical 30,000 to 40,000 ton cargo.

You pull two years of monthly history and see:

• AMM domestic vs Platts CFR Turkey often differ by 25 to 50 dollars per ton.

• After you subtract freight, the “export netback” is sometimes 10 to 20 dollars better than domestic, sometimes 10 to 15 worse.

• You realize that your “AMM minus X” long term domestic contracts did not move in line with export parity. You left money on the table in tight export periods.

Step 2: Build a simple export parity model

You decide that every month you will calculate an export netback price to your yard.

Example month

• Platts CFR Turkey HMS: 410 dollars per ton.

• Estimated vessel freight: 35 dollars per ton.

• Port, handling, and finance: 10 dollars per ton.

Export netback to yard: 410 minus 35 minus 10 equals 365 dollars per ton.

In the same month:

• AMM domestic HMS: 340 dollars per ton.

• Your contract with a local mill: AMM minus 5 equals 335 dollars per ton.

You now see a gap: 365 netback export vs 335 domestic contract.

Difference: 30 dollars per ton.

On a 10,000 ton month to that mill, you gave up 300,000 dollars in spread that you could have captured by either:

• Raising your “minus X” discount at the next review.

• Shifting more tonnage to export.

• Or both, in a controlled way.

Step 3: Redesign domestic contracts

You pick one mill where the relationship is stable and suggest an update at renewal.

New structure:

• Base: AMM domestic HMS monthly average.

• Premium band tied to Platts CFR Turkey netback.

Commercial terms in plain language

• You agree a “target netback” band for you as a yard.

• If export netback sits inside the band vs AMM, you keep the old “minus X.”

• If export netback is much higher, you share the upside.

• If export netback collapses, you protect the mill by keeping some downside.

Example clause outcome

• Band: export netback minus domestic AMM between plus 5 and plus 20 dollars per ton.

• Sharing rule:

If export netback minus AMM is above 20, the mill agrees to move your discount from minus 5 to, say, flat AMM, for as long as the spread stays that wide.

If export netback minus AMM is below 5, you lower your discount to minus 10 to help the mill stay competitive.

You simulate this rule over the last 24 months. Result:

• Yard realized price improves by 6 dollars per ton on average.

• Mill still pays below export parity in peak export months.

• Both sides avoid bitter renegotiations in extreme periods.

On 150,000 tons per year to that mill, a 6 dollar improvement equals 900,000 dollars per year of added gross margin for you.

Step 4: Tighten export pricing discipline

You also clean up export terms.

Before:

• You priced each cargo by feel, looking at Platts and what other exporters say.

After:

• You fix a clear internal formula:

Base: Platts CFR Turkey for the agreed loading window.

Adjustments: fixed freight and handling assumption, clear minimum margin per ton.

• You only quote cargos where the margin vs your domestic option is at or above a threshold, for example 7 to 10 dollars per ton.

You also keep a small "trial" export contract linked more formally to Platts, with a banded premium that reflects freight volatility. That gives you a reference to compare against spot cargoes.

Step 5: Build the spread dashboard for this yard

Your dashboard now tracks:

• AMM domestic HMS index.

• AMM East Coast export yard HMS, if used.

• Platts CFR Turkey HMS.

• Freight assessment East Coast to Turkey.

• Export netback vs domestic AMM, in dollars per ton and as a rolling chart.

• Volumes sold to each mill and to export each month.

• Average realized price per ton vs each index.

You set alert levels:

• If export netback minus AMM is above 20 dollars per ton for three weeks, you trigger a commercial review with each domestic mill.

• If export netback minus AMM is negative for more than a month, you slow export offers and shift volume to domestic buyers where possible.

Step 6: Result over one sample year

You run this system for a test year:

• Total volume: 300,000 tons.

• Mix: 180,000 tons domestic, 120,000 tons export.

• Average realized uplift vs old pattern:

Domestic: plus 6 dollars per ton due to better discount terms.

Export: plus 4 dollars per ton due to cleaner netback rules.

Total annual benefit:

• Domestic: 180,000 × 6 = 1.08 million dollars.

• Export: 120,000 × 4 = 480,000 dollars.

• Combined: about 1.56 million dollars additional gross margin, without adding new equipment or volume.

The only real change was treating AMM and Platts as a controlled spread, feeding that into contracts and pricing, and checking it daily.

Worked example 2: Aluminum sheet producer supplying auto OEMs in Europe and Asia

Profile

You run an aluminum rolling mill in Europe that produces sheet and coil for automotive body panels and structural parts.

• Annual output: 400,000 tons of auto grade coil.

• Sales split:

60 percent to European OEMs.

40 percent to Asian OEMs.

• Inputs: primary aluminum ingot, scrap, energy, alloying elements.

• Current pricing:

Most contracts to OEMs are "LME plus regional premium plus conversion fee," renegotiated yearly.

Your scrap and energy costs move on separate patterns and are not fully captured in the formula.

Step 1: Map your cost and price references

Base cost and hedging references:

• LME 3 month aluminum for primary metal.

• Regional aluminum premium references, for example duty paid Rotterdam.

• Platts or other indices for scrap price in your region.

• Internal energy cost curve, often linked to power contracts or TTF type gas references.

Sales references:

• European OEMs: LME 3 month plus EU premium plus conversion fee.

• Asian OEMs: LME 3 month plus MJP type premium plus conversion fee.

You build a cost model that shows:

• Primary metal accounts for about 60 percent of your cash cost.

• Scrap offsets maybe 10 to 15 percent of that metal cost.

• Energy is 15 to 20 percent.

• The rest is labor, overhead, and alloy additions.

You see that contracts only capture the first piece cleanly. Scrap and energy exposure float in the background.

Step 2: Introduce a hybrid index basket for key OEM contracts

You sit with two anchor OEMs, one in Europe and one in Asia. You present a clearer formula that links their price to your real risk.

Example for a European OEM

• Weighted base price:

70 percent LME 3 month average for the month before delivery.

20 percent European regional premium index monthly average.

10 percent regional scrap index for auto sheet scrap.

• Conversion fee: fixed per ton, reviewed once a year with a clear inflation and wage index.

Why this helps both sides

• For you:

Scrap prices now link to your sales price, so scrap spikes do not crush margin.

The weightings match your cost reality, based on two years of analysis.

• For the OEM:

They gain clearer visibility on how prices move with the market.

They know they are not overpaying when scrap or premia fall.

You test this structure on two years of history:

• Under the old formula, your margin swung between minus 30 and plus 70 dollars per ton in extreme months.

• Under the new basket, the range narrows to minus 10 to plus 40 for the same periods.

• Average margin improves by about 15 dollars per ton because you avoid long stretches where scrap rose and your price did not.

On a 120,000 ton annual supply to that OEM, that 15 dollars uplift is worth 1.8 million dollars per year.

Step 3: Add an explicit sustainability premium path

Your OEMs care about carbon footprint and plan to meet strict fleet targets. You decide to introduce a clear low carbon premium option.

You offer two grades:

• Standard coil, priced by the basket above.

• Low carbon coil, same formula plus a "green" premium in a narrow range, for example 20 to 40 dollars per ton.

You tie this premium to:

• Verified emissions per ton of primary aluminum and scrap mix.

• External certification and full documentation.

You agree that the green premium will be reviewed each year based on:

• Market demand for low carbon units.

• Your own investment in cleaner power or scrap ratio.

This gives you a path to pay for decarbonization investments. It gives OEMs a clear line item for their sustainability budgets.

Step 4: Align hedging with the new structure

You adjust your hedge policy to match the formulas.

Before:

• You mostly hedged LME futures for 3 to 6 months ahead on a rolling basis.

• Premia, scrap, and energy moved freely, often hurting you.

After:

• You hedge LME base metal volume that matches the 70 percent basket share.

• Where available, you use premium swaps or futures for regional premia.

• You measure scrap index exposure and consider supply contracts or swaps if liquidity exists.

• You run monthly reports that show hedge coverage for each index component.

You also set clear rules:

• No hedge is allowed that does not tie back to a physical contract or to a clear policy for open capacity.

• Basis risk between LME and any alternative benchmark is tracked and capped.

Step 5: Create a cross region spread dashboard

Your dashboard focuses on:

• LME 3 month aluminum.

• European regional premium indices.

• MJP or similar Asian premium indices.

• Scrap indices for your main regions.

• ShFE aluminum and alumina as early signals of Asian tightness.

Key spreads you watch:

• EU premium minus Asian premium.

• LME minus ShFE implied price (after FX).

• Scrap index minus LME, to track how much value you extract from recycled feed.

You map your contract volumes to these indices:

• 240,000 tons to EU OEMs on the hybrid basket.

• 160,000 tons to Asian OEMs on a similar structure, slightly different weights, for example more weight on Asian premium.

Your alert rules:

• If ShFE trades far above LME for several weeks, you expect Asian premiums to rise. You prepare for tighter supply and possible contract reviews.

• If scrap prices rise faster than LME across both regions, you check whether the 10 percent scrap share in the basket still covers your exposure.

Step 6: How this plays out in one stress event

Scenario: congestion at major EU ports and a short power supply period push European premiums from 250 to 450 dollars per ton within three months.

Old world

• You had many contracts simply on LME plus "market premium."

• You could not pass through the full premium rise fast enough.

• Your margin on EU OEM contracts shrank by 40 to 60 dollars per ton.

New world with hybrid basket and bands

• Your basket formula already has 20 percent weight on the premium index.

• You also included a premium band and sharing rule similar to the templates in Part 3.

• When the premium jumps above the band, you pass part of that through automatically under the contract, and part you absorb.

Result over the surge:

• Margin still compresses, but by 20 to 25 dollars per ton instead of 60.

• You maintain supply without frantic renegotiations.

• The OEM sees a controlled cost rise and can plan pricing and model mix accordingly.

Across 200,000 tons shipped during that stress period, the difference between losing 60 and losing 25 dollars per ton is 7 million dollars in preserved earnings.

Putting it together

In both examples, nothing magical happens.

You map your true exposure.

You pick indices that mirror that exposure.

You write simple, clear rules in your contracts that tell both sides what happens when spreads move.

You build a small dashboard that shows those spreads and links them to volumes.