CME ‘On Track’ With Aluminum Futures as Premium Trade Surges

CME Group Inc., the world’s largest futures exchange, is “on track” to introduce a physically settled aluminum futures contract and is considering starting other metals products.

CME said last year it planned to start an alternative to the aluminum contract traded on the London Metal Exchange, the biggest metals bourse, to improve transparency. Consumers including brewer MillerCoors LLC complained that long waits to withdraw metals from warehouses monitored by the LME distorted prices, while producers including United Co. Rusal said the exchange needed to improve transparency.

“We are still on track and are very pleased with the amount of engagement from the industry,” Harriet Hunnable, managing director of metals at Chicago-based CME, said yesterday in an interview in London, declining to provide a start date for the new contract. “I am confident we will have liquidity. I expect a good non-U.S. participation in this contract.”

CME added aluminum premium swap futures in 2012 that are cash-settled. The new aluminum futures contract will trade electronically and on the Comex floor in New York, according to Hunnable. The metals industry asked for a contract listed on a U.S. exchange, she said. Existing contracts don’t fully meet the needs of the global aluminum market, Hunnable said.

‘Further Opportunities’

“We are definitely looking at further opportunities,” Hunnable said. “There is a lot of focus on warehouses, but there has to be focus on transparency, more centralized liquidity, more dynamic products.”

CME is looking at “a lot of new products” and may consider a product based on European aluminum premiums, she said. Trading of its Midwest U.S. premium contract surged last month as the surcharge soared to a record, Hunnable said. Traders bought and sold 231 contracts in January, compared with a single one in the prior month, CME data show.

“We have seen the industrial users actively using the premium contract,” Hunnable said. “There is a big community that only now is starting to understand the contract.”

Premiums added to the LME price of aluminum in Europe, the U.S. and Asia climbed to records last month, widening a gap between the full cost of obtaining aluminum and the LME benchmark price. A backlog to obtain metal at some LME-approved warehouses along with financing transactions helped limit availability of the metal.

The LME, which regulates more than 700 warehouses, announced in November steps to help ease backlogs at some locations after complaints from metal users. The world’s biggest metals bourse has “committed” to explore the potential introduction of premium contracts to help the market manage risk, it said in a Feb. 5 notice. It’s considering a deliverable aluminum premium contract, a person familiar with the matter said

Aluminum is the most-active contract on the LME, with 66.6 million futures and options traded last year, according to the exchange. Each futures contract is for 25 tons.

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