WSMD

The first time I saw this acronym I did a double take. For a second I thought my trader was telling me about a risqué quirk of his.

Of course it turned out to be something far less scandalous, but far more important.

WSMD = Weighing, Sampling, Moisture Determination, and Assaying.

It is one of the most important terms in commodities and traders will have entire WSMD departments because of it.

WSMD can have drastic impacts on the price, profit levels, and hedging requirements.

Take a copper concentrate parcel of 10,000 WMT (Wet Metric Tons). A concentrate parcel will have an assumed moisture level, metallic content, and payable percentage that is linked to the recovery rate when processing.

Someone unfamiliar with WSMD may think the exposure is on the gross 10KWMT, but we only hedge our exposure to the payable volume. In the case of concentrates, our exposure is only on the dry, metallic, payable content.

Let's assume an 8% moisture level, a 25% copper content, and a 96.5% payable. This means our exposure is:
▪️ 10,000 * 0.92 = 9,200 Dry Metric Tons
▪️ 9,200 * 0.25 = 2,300 Metallic Contained Tons
▪️ 2,300 * 0.965 = 2,219.50 Payable Tons

To the nearest lot on the LME this would be 2,225MT or 89 lots. If this was pricing on the CME it would be 4,900,000lbs or 196 lots.

However, these calculations are usually made on provisional assays - chemical analysis of the material. Unless you can agree on a second QP for differences between provisional and final assaying, an exposure may exist.

Even a small shift from 25% to 24.5% would mean the correct payable tonnage is 2,175.11MT, or 2,175MT/87 lots. You would be over-hedged by 2 lots. It doesn't take long for a 50MT exposure to become very costly.

This is why WSMD departments work hand in hand with operations and risk desks to ensure that any exposures are mitigated as quickly as possible.

Understanding nuances like WSMD is often the difference between profit and loss, and between a long career vs. a short one.