Vancouver 23/09/2015 - Trading interest in the CME Group's Aluminium Midwest US transaction premium Platts (AUP) contract has actually increased during the recent period of relatively stable premiums, Fred Penha, CME director of metal products said on Tuesday.
Over the past two years, the US Midwest aluminium premium has gone on an precedented wild ride. Throughout 2014, the premium rocketed higher, peaking at an all-time record high of 24 cents per pound near the end of last year.
Then the premium collapsed in April, falling for 17 straight weeks before levelling off at 7-8 cents during the early summer.
The CME's AUP contract is a tool that allows participants to hedge their premium risk. Conventional logic would suggest that producers or consumers would want to hedge in times of extreme volatility.
But that's not what has happened. In reality, open interest in the AUP contact increased during August and September, two months when Midwest premium traded in tight one cent range and the forward curve was relatively flat.
"When premiums were super volatile, people were afraid to touch [the AUP contract] because it appeared too risky. We also ran into an issue where there would only be buyers or sellers depending on which way the premium was moving," Penha said at the Metal Bulletin International Aluminium Conference here.
"Our concern was that people wouldn't want to hedge any more once premiums crashed. But we've found that the opposite happened - the data supports the notion that the less volatile the premium has been, the more volume that actually gets traded," he said.
AUP open interest reached a record 19,335 contracts on September 1 this year and currently stands at 19,017 contracts (475,425 tonnes). This is about three times the level seen at the beginning of the year.
AUP October now trades at 7.448 cents, which is more or less in-line with current spot prices, while each contact month in the first half of 2016 is at 6.5 cents. Further out, second half of 2016 averages 6.25 cents.
Penha added that the "new normal" of less volatile premiums could bode well for the the new European aluminium premium futures contract that launched on Monday.
The Comex European contract for duty-unpaid metal is also 25 tonnes in size and will be financially settled against the Metal Bulletin assessment of aluminium spot price transactions in Europe.