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CME aluminum contract good for mart: traders

Keywords: Tags  CME Group, aluminum futures, aluminum, LME, London Metal Exchange, Midwest premium, Comex, Nathan Laliberte

NEW YORK — Initial reactions to CME Group Inc.’s new aluminum futures contract have been mostly positive, although sources warned that the long-term success of the contract hinges on active participation from all sides of the market.

"We’re quite interested and supportive of it," one trader said of the contract. "We believe anything that can add more liquidity and bring clarity to the market is good."

Prior attempts to establish aluminum futures contracts were hampered by "limited warehouse locations, shape restrictions" and muted interest from market participants, the trader noted.

"Those issues may still exist," he said. "The difference is how the market views an aluminum contract in today’s environment. In that sense, this is the best opportunity there has ever been for the contract to succeed. Essentially, when people are pissed off with prices, the time is right to issue a new pricing tool."

The contracts, which are 25 tonnes in size and deliverable to North American warehouses, will provide global aluminum market participants a way to manage exposure to "volatile North American prices" CME Group said, while allowing access to physical aluminum at several CME Group-approved warehouses in Baltimore, New Orleans and Ypsilanti, Mich. (, March 18).

Relative to warehousing, CME Group may be looking to expand its number of approved warehouse locations. "What we’ve told customers is, to date, seven firms have applied to become exchange-approved warehouses for aluminum, deliverable against the Comex aluminum futures contract," a CME Group spokesman told AMM via e-mail.

Additional warehouse locations being considered by CME Group include Kodiak Warehouse LLC, Toledo, Ohio; Dearborn Distribution Services, Dearborn, Mich.; Henry Bath LLC, Chicago; and BTG Pactual Commodities Warehousing (US) LLC, Owensboro, Ky.

Concerns over limited warehouse locations are largely overblown, a second trader told AMM, adding that most participants are unlikely to ever take delivery of the metal.

"If you are going to use the contract for spot physical delivery, it’s not for you," he said. "If it’s a proxy for Midwest (premium), then this is for you. It’s just a mechanism for price discovery. The warehouses are the backstop—it’s what creates a cash/futures convergence."

While some believe the contract will capture market share from the London Metal Exchange, arbitrage opportunities may exist between the two exchanges, a third trader said. "They (the LME) are the 800-pound gorilla in the room. The CME contract is a competitor to them, but it could be that they both benefit through arbitrage situations."

"As a general principle we don’t comment on business conducted at other exchanges," an LME spokeswoman said, declining to comment.

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