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LME ‘committed’ to premium-hedging probe

Feb 05, 2014 | 01:09 PM | Mark Burton

Tags  London Metal Exchange, LME, aluminum, aluminum premiums, warehousing, Mark Burton


LONDON — The London Metal Exchange is "committed" to investigating the viability of on-exchange premium-hedging and discovery tools, head of business development Matt Chamberlain said Feb. 5.

The statement came after a spike in aluminum premiums, particularly in North America, which has increased the portion of buyers’ all-in purchasing costs that cannot be hedged on the LME.

The LME said it recognizes that the queues at certain warehouse locations, such as Detroit and Vlissingen, the Netherlands, have contributed to the massive rise in aluminum premiums in recent months. By reducing queues over time, it expects the premiums to increasingly reflect underlying supply and demand.

"Non-queue-related premiums are outside the scope of LME prices, and are driven instead by specific market supply and demand factors. Nevertheless, the LME has committed to explore the potential introduction of premium-hedging tools to help the market address risk-management concerns," the LME said.

"While regional premiums are a natural feature of a global contract, we remain committed to investigating the possible introduction of premium-hedging tools to aid premium discovery and hedging," Chamberlain said.

Skyrocketing North American premiums have triggered a rise in trading volumes on the CME Midwest premium futures swap, which was launched last year to "complement the LME aluminum contract."

If the LME does choose to create similar hedging products, it would be able to do so only after the launch of the LME Clear clearinghouse in September, an exchange spokeswoman told AMM sister publication Metal Bulletin.

Building on commitments made in its warehouse review late last year, the LME has hired consultancy Oliver Wyman to conduct a logistical review of its warehouse network and law firm Addleshaw Goddard to review its warehousing agreement, the exchange announced Feb. 5.

It also has appointed Phillip Crowson chairman of the new physical market committee, and removed all nonwarehousing members from the warehouse committee, the exchange said. Fabian Somerville-Cotton will continue to chair the warehousing committee.

Crowson, who spent more than 25 years with Rio Tinto Plc, started his career in metals in 1971. He has been an honorary member of the LME since October 2009 and served as an invited director for 12 years.

"Other prospective physical market committee members have been contacted, and their appointments are currently being formalized," the LME said. "Appointees include individuals who nominated themselves for the committee, and also those serving at the request of the exchange, in order to achieve balance across metals and roles in the production chain."

A version of this article was first published by AMM sister publication Metal Bulletin.




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