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CME plans physical aluminum futures contract

Keywords: Tags  CME Group, aluminum futures contract, London Metal Exchange, LME, aluminum, Garry Jones, Harriet Hunnable, Tim Weiner MillerCoors Global

NEW YORK — CME Group Inc. plans to launch a North American physically delivered aluminum futures contract starting May 5, pending regulatory approval.

The contract will be 25 tonnes in size and will be available for trading on the floor and electronically via CME Globex, as well as submission for clearing through CME ClearPort. It will be listed by and subject to Comex rules.

The contract is being introduced at a time when Midwest premium prices have increased more than 50 percent since the start of the year.

Market participants have been clamoring for a way to hedge the physical component of their risk management exposure following a dramatic rise in premiums over the past few years. The London Metal Exchange is looking at possible contracts, although it has not yet committed to a launch.

LME chief executive officer Garry Jones recently told AMM that if the exchange launches a physical contract it likely would look at securing market makers to get the product going (, March 14).

“Our customers want a North American physically deliverable aluminum futures contract from CME Group that provides them with greater transparency,” said Harriet Hunnable, CME Group’s managing director of metal products. “Together with our aluminum Midwest U.S. premium contract, this new benchmark will enable industry participants to better hedge their North American aluminum price risk.”

Chicago-based CME Group introduced its financially settled U.S. Midwest aluminum premium contract in April 2012. It has traded the equivalent of more than 16,000 tonnes since the start of this year.

According to the CME, the new aluminum futures contract will offer global market participants a new tool for managing their exposure to volatile North American prices while giving them access to physical aluminum at a number of CME Group-approved warehouses across the United States.

“We use aluminum extensively in our packaging and it’s one of the single largest commodity price risks we face today as a company and an industry,” said Tim Weiner, global risk manager of commodities and metals for Chicago-based MillerCoors LLC. “We see this North American aluminum contract, which will combine both the underlying price of aluminum along with the premium, as a potentially useful tool to help us eliminate many hedge accounting issues.”

Weiner testified at a U.S. Senate hearing last summer on the role of banks in commodities, catapulting the debate over the LME’s warehousing rules into the media spotlight.

“We believe this new aluminum futures contract will give us the ability to hedge aluminum price risk, including the North American premium, further out along the curve than we are able to with existing risk management products today,” said David Brown, chief operating officer of Louisville, Ky.-based Tri-Arrows Aluminum Inc.

The CME has received applications from three companies to register as warehouse operators for the new physical aluminum futures contract. Scale Distribution Ltd. has applied in Ypsilanti, Mich.; C. Steinweg (Baltimore) Inc. has applied in Baltimore; and Henry Bath & Son Ltd. has applied to be approved in New Orleans.

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