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Aluminum swaps contract still quiet

Keywords: Tags  CME Group, LME, London Metal Exchange, aluminum, swaps contract, Suzy Waite


NEW YORK — CME Group Inc. continues to approach potential customers in an effort to see its fledgling aluminum premium swap futures contract gain traction, a spokesman for the Chicago-based exchange told AMM.

"Right now, we’re continuing to talk with customers and help them understand the benefits of the contract," the spokesman said, noting that it’s not unusual for new contracts to take some time before garnering interest.

"What generally happens when we launch contracts, it’s less of a big bang. If you take any of our benchmark contracts, like oil, gasoline, or even gold and silver, they all started out very slowly. It takes time for the market to (warm up)," he said.

CME’s Midwest aluminum premium swap futures contract, which was launched in April based on Platts’ premium assessment, has yet to trade. The contract was introduced some two and a half years after CME opted to delist its aluminum futures contract due to inactivity (amm.com, Oct. 6, 2009).

Market participants said a lack of liquidity is largely behind their reluctance to use the new contract during its first five months of activity.

"It came out (in April) and that’s the last I heard of it. There doesn’t seem to be any liquidity," one trader said. "The bid and the ask were too large and people were ignoring it. No one is paying any attention to it. ... We have never successfully (used) an aluminum contract other than the LME."

A second aluminum trader agreed, noting that his company hadn’t yet taken a hard look at the nascent swap product. "They talked to us about it (but) it’s kind of in a vacuum," he said.

The contract is a good idea in theory, traders said, but added that CME needs more support from producers, consumers and traders before it can take off.

"It’s a good idea. It would determine what the real premium is," the first trader said.

The swap futures contract is intended to allow buyers and sellers a vehicle to financially hedge against the Midwest aluminum premium, which has soared to record levels this year largely due to traders storing millions of tonnes worth of aluminum in warehouses around the world—a large share of which is in Detroit.

AMM’s Midwest spot premiums are between 11 and 11.5 cents per pound, more than double the October 2009 premiums of between 5.25 and 5.5 cents per pound.

As a result of the run-up, premiums have become a significant part of consumers’ costs, CME said, arguing that the new swap contract would allow for all parties—producers, distributors, traders, banks and consumers—to hedge against the skyrocketing input.

"This is the first exchange product that enables the aluminum Midwest premium to be managed," CME wrote in a document explaining the contract posted to its website. "This contract enables market participants in North America to better manage their price risk. It’s a hedging opportunity for the U.S. aluminum industry to mitigate the risk on the Midwest premium."

The swap contract should be seen as a compliment to the existing LME deliverable aluminum contract as opposed to a competing contract, the CME spokesman said.

"It’s not necessarily going head-to-head (with the LME contract)," he said. "You wouldn’t take a product like this and compete with a deliverable futures contract."


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