Regional Premiums In Nonferrous Metals Markets

Peculiarities of the LME contract structure give the impression that exchange spot prices measure transaction prices paid by consumers and received by producers. This impression can be misleading. Transaction prices also include a regional premium that can account for a substantial component of the full price. In well-supplied markets, premiums measure the cost of intermediating exchange warehouses and consumers. In periods of tight demand they reflect the urgency of consumer requirements. I use a Markov-switching model to analyze the regional and temporal variation in aluminum and zinc premiums.