Chicago 02/10/2015 - The CME Group is looking to encroach further on London Metal Exchange (LME) territory, revealing on Thursday that it plans to roll out lead futures later this year.
CME will introduce a physically delivered lead futures contract, priced in dollars for 25-tonne lots of 99.97 percent metal, multiple sources, told FastMarkets.
The timing of this news - just days before the start of LME Week, the most important date in the London bourse's calendar - is perhaps telling.
While the LME remains the dominant player in the base metals space, CME has remained aggressive as it looks to establish regional contracts that are attractive to investors who prefer the more traditional US-style futures contracts.
Indeed, its European aluminium premium duty-unpaid futures contract, which rolled out last month, is intended to establish a benchmark similar to the aluminium Midwest US transaction premium Platts (AUP).
"We really focus on much more of the need of the customer and providing value back to the customers, and I think the Midwest aluminium premium [contract] is a great example of that," Young-Jin Chang, global head of base and ferrous metals at CME Group, told FastMarkets in a telephone interview.
"Those customers... also mentioned the need for a European premium contract," he added.
The CME developed the AUP contract as a response to extreme volatility in the US Midwest premium, which soared to an all-time record of 24 cents per pound in 2014 before collapsing to about 7.0 cents today, according to FastMarkets' physicals research.
The inability for producers and consumers to hedge properly in such an unpredictable market provided CME with an opportunity to establish a foothold.
Open interest in the AUP contract has grown from 3,000 contracts earlier this year to the current level of roughly 20,000 contracts, which equates to 500,000 tonnes of aluminium, according to CME data.
"Until we introduced the Midwest aluminium premium contract, there was no [easy] way for the market to hedge the premium," Chang said. "Aluminium premium volatility over the last three years or so has been more than ever before."
But while the AUP contract has garnered growing liquidity and popularity, the CME's Comex North American physically delivered aluminium futures (ALI) contract has failed to attract much support.
The ALI contract, launched in June 2014, was intended to rival the LME's well-established benchmark futures but open interest has lingered at the low hundreds for the past few months.
This is not the first time that the CME has waded into the physical aluminium market. In 1983, Comex launched a dollar-denominated contract to compete with the LME's sterling-priced product. But that fizzled out in 1987 when the LME began pricing in dollars.
And in 1999, the exchange launched the Comex aluminium contract, which was supported by big US auto companies such as General Motors. But those companies were severely hit by the slump in demand caused by the financial crisis. In 2009, CME delisted its inactive aluminium futures contract, as well as its aluminium options contracts.
Still, there might be a sliver of hope for the ALI contract. CME in-warehouse stocks have climbed to almost 47,000 tonnes, with nearly 36,000 tonnes in Detroit sheds.
"[We've] seen a 120 percent increase in eligible and warranted material since the inception of the contract. That's a very positive sign - material is coming in and is ready to be traded. It takes time to grow the liquidity but we are nonetheless working with the industry to address these concerns," Chang said.
In the past, the CME has cited its warehousing system and rules intended to avoid long lines as potential incentives for investors. If lines are longer than 20 business days at any delivery point, the warehouse must justify the queue to an independent CME committee, which has no financial link to warehouse rents.
ZINC CONTRACT HITS MILESTONE
In June, the CME fired another shot across the bows of the LME with its zinc contract, launched at the end of June this year and the first North American zinc futures traded in more than 30 years.
But like its physical delivered aluminium contract, volumes have been low - it has found it difficult to match the liquidity of its successful copper and AUP contracts.
Similarly, though, market participants are starting to find a use for the contract, judging from recent inventory moves - the metal tonnage in CME warehouses has risen to just below 40,000 tonnes.
Typically, investors wait till the first physically deliverable date before heavily investing into a contract, said Chang, who added that, given robust deliverable material and the first delivery month in October, the contract should start to gain traction.
(Editing by Tom Jennemann and Mark Shaw)