Winter Park, Florida 18/05/2015 - The CME Group believes that there is unfulfilled demand for regionalised base metal contracts given global supply/demand imbalances and increasingly divergent regulatory structures.
CME announced on Monday that it will launch physically delivered zinc futures as of June 29 this year pending all relevant regulatory review periods.
Comex zinc futures will be priced in US dollars; each lot will represent 25 tonnes of special high-grade (SHG) zinc of 99.995 percent purity, with October 2015 the listed starting month for trade electronically via CME Globex and through through CME ClearPort.
C. Steinweg, Henry Bath and Dearborn Distribution Services have applied to become exchange-approved warehouses for the delivery and storage of physical zinc in the Baltimore, New Orleans, Chicago and Detroit regions.
In zinc, the London Metal Exchange is the dominate force. In April, its zinc contract saw 2.4 million lots or 60.3 million tonnes traded, while 435,925 tonnes of the galvanising metal is held in LME-registered sheds.
But the CME contends that a single worldwide benchmark price is no longer adequate to meet the needs of all market participants in all parts of the globe, especially when considering increased volatility in regional premiums and unprecedented regulatory complexities.
"This contract is targeted at North America," Young-Jin Chang, CME director of metals research and product development, told FastMarkets in a telephone interview.
"Our goal is to create a contract whose price is closer to the actual buying price paid by North American consumers. One that not only reflects [the underlying price for zinc] but also the regional premium and the duty components."
"We want to provide a different value position and risk management tool to market participants," Chang added.
Michael Camacho, JPMorgan Chase & Co co-head of global commodities, said that he is pleased that the CME has responded swiftly and decisively to industry feedback for a new and transparent North American benchmark for zinc.
"We expect this contract will bring new opportunities and enhance the risk-management services that we offer in zinc for our commercial customers in North America." Camacho said according the CME Group's press release.
In addition to its well-established and liquid Comex copper contract, the CME in May 2014 launched a physically deliverable aluminium contract in direct reaction to the growing chorus of consumer discontent at LME warehouse queues and high regional premiums.
The Comex aluminium contract has struggled to gain liquidity so far, but this is a common state of affairs with new futures contract. It took the LME benchmark aluminium contract well over a decade to gain market-wide acceptance. Open interest in the CME aluminium contract stands at just 156 lots or 3,900 tonnes.
CME also lists a financially settled Aluminium Midwest US transaction premium Platts (AUP) contract, which has been relatively successful thanks largely due to unprecedented volatility in regional aluminium premiums. Open interest in this contract stands at 7,374 lots or 184,350 tonnes.
"It takes time to develop liquidity in new contracts," Chang said. "We remain very much committed to our aluminium contract and we have already seen a good deal of traction on our premium contract. When you launch these types of contact, you have to take a long-view and that's exactly what we're doing."