Winter Park, Florida 25/05/2016 - The CME Group has gained a foothold in the aluminium market by launching simple cash-settled futures contracts targeted at regional participants.
For decades, the London Metal Exchange's primary aluminium contract has been the undisputed global benchmark price, a state of affairs unlikely to change in the near future considering the contract's deep liquidity, large volumes and industry-wide acceptance.
CME in 2014 unveiled a rival physically traded P1020 aluminium contract buy, unsurprisingly, that product has yet to get off the ground. Open interest in CME ALI is still a lacklustre 274 lots or 6,850 tonnes.
But the US exchange has been much more successful in launching financially settled contracts that use the LME as a basis price or are marketed to specific players along the supply chain.
The most notable example is the Aluminum MW US Transaction Premium (AUP) contract, which started trading in August 2013 and gained healthy volumes and open interest by the summer of 2015. Just this week, AUP open interest spiked to a record 27,369 lots or 684,225 tonnes.
Market participants clearly see the benefit of an exchange-listed and transparent contract that tracks regional aluminium premiums - a market traditionally traded and settled OTC.
CME has also launched Metal Bulletin European premium duty-unpaid (DUP) and duty-paid (DP) contracts as well as a Platts Major Japanese Ports (MJP) contract. While not as liquid as AUP, each trade regularly.
"We feel very positive about the momentum we've gathered over the past three years with our US MW premium contract, which now has open interest of nearly 700,000 tonnes. We have a very similar story with a lot shorter learning curve for our Japanese and European premium contracts," Young-Jin Chang, CME executive director of metals products, told FastMarkets in an interview.
The LME offers its own aluminium premium contracts but those are more complicated and have been largely ignored.
VENTURING INTO ALLOYS
CME will expand its base metals suite by introducing a North American alloy futures contract on June 6. This 20-tonne Comex product will be financially settled against the S&P Global Platts assessment of the MW US A380 alloy price.
"We expect the alloy contract to be a good add-on offering for the aluminium industry," Chang said. "We're trying to serve our global customer base, while also providing something more regionally specific to fit their needs. Our track record shows that this game plan works."
The CME A380 contract will be a direct competitor to the LME's North American Special Alloy Aluminum Contract (Nasaac), which launched in 2002 but has seen steadily declining volumes since 2008.
Nasaac fell out of favour with some die-casters and fabricators earlier this decade after the long queue to remove metal from Detroit warehouses led to some perceived price distortion. Several major players abandoned Nasaac and started pricing monthly and annual contracts using the Platts Midwest US A380 alloy index.
"Folks have told us that there's been a lot of deals done physically on a Platts basis. They would like to have a hedging solution based on that," Chang said.
LME floor traders, meanwhile, told FastMarkets that the Nasaac contract is one of the exchange's second-tier products so the competitive challenge from CME is not a major concern.
Although Nasaac has performed comparatively well since its spin-off from the LME's original Secondary Aluminium contract, it still only attracts limited interest.
"All the metals, not just the alloys, are not great at the moment if you look at the turnovers. This [CME contract] might actually be marginally good for us as we could possibly arbitrage against the two of them," a floor trader said.
Others were less optimistic, however.
"On balance, it won't make much difference. We see some end-ring pricing orders but doubt if we could generate much extra business. It will depend on what customers want and whether they think CME is a better option for that," another trader said.
(Additional reporting by Martin Hayes and Dalton Barker, editing by Mark Shaw)