CME Group Inc. (CME:US), owner of the world’s largest futures exchange, will start physically-delivered North American aluminum futures on May 5.
The contract will serve as a price reference for the region’s aluminum industry and will trade on the floor as well as electronically, with over-the-counter trades executed on CME Clearport, the exchange said in a statement today. Each contract will be 25 metric tons, the exchange said, adding that trading is pending regulatory approval.
CME said last year it planned to start an alternative to the contract traded on the London Metal Exchange, the world’s biggest marketplace for industrial metals trading. Consumers including brewer MillerCoors LLC complained long waits at LME warehouses distorted prices and producers from United Co. Rusal to Alcoa Inc. said the exchange needed to improve transparency.
“We are responding to the industry needs for a transparent North American aluminum futures benchmark,” Harriet Hunnable, CME’s managing director for metals, said in a phone interview today. “Customers have asked CME Group to provide them with a physically delivered aluminum futures contract with delivery locations throughout the U.S. that provides them with greater transparency than they have today.”
The contract will complement aluminum premium swap futures introduced in 2012 that are cash-settled. A more than 50 percent surge in premiums since the start of the year reflects growing demand for the metal and supply constraints in the U.S., according to CME.
Futures will provide “true convergence” between traded and physically delivered markets, said Hunnable, who forecast a robust and growing market.
“We use aluminum extensively in our packaging and it’s one of the single largest commodity price risks we face today as a company and an industry,” Tim Weiner, global risk manager at MillerCoors, said in the statement. “We see this North American aluminum contract, which will combine both the underlying price of aluminum along with the premium, as a potentially useful tool to help us eliminate many hedge accounting issues.”
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. The bourse is also considering a deliverable premium contract, according to a person familiar with the plan.
The metal for three-month delivery on the LME fell 3.5 percent this year to $1,736.50 a ton. Premiums added to the LME price in Europe, the U.S. and Asia climbed to records this year, widening a gap between the full cost of obtaining aluminum and the 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, will start measures next month to help ease backlogs at some locations after complaints from metal users. Twenty-six class-action lawsuits were filed against the LME by aluminum consumers, its owner Hong Kong Exchanges & Clearing Ltd. said March 14, adding that the lawsuits are without merit.
A number of U.S. locations will have warehouses where aluminum may be delivered, CME’s Hunnable said, declining to comment further. The exchange will release more details on the planned contract closer to the launch, she said.
“We will have our rules,” Hunnable said. “This will provide load out rules which are fit for purpose for the aluminum industry. They will be subject to the rules and regulation of our Comex exchange rule book. And we have a strong track record of ensuring efficient delivery of physical metals.”
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