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Physical aluminum contract needed to help mart

Keywords: Tags  aluminum, Bob Biolsi, CME Group, physical aluminum contracts, London Metal Exchange, LME, Matt Chamberlain, Nick Madden Novelis

PHILADELPHIA — The North American aluminum market needs exchange-traded physical contracts that allow market players to actively participate in a regional pricing strategy and properly manage risk exposure, according to panelists at AMM’s Aluminum Summit in Philadelphia.

"The global pricing strategy based on the (London Metal Exchange) contract is less relevant to the North American market," Bob Biolsi, senior director of energy research and product development at Chicago-based CME Group Inc., said in response to a question about the long-term viability of CME’s new North American aluminum contract, which was launched May 6. "We wanted to move to a regional pricing strategy. Our initial launch ... is really focused on the U.S. market. By doing so, we will be able to allow the industry to readily evaluate fundamentals."

Biolsi said the CME has "no vested interest in warehousing facilities" associated with the contract. "By having warehouses that are independent of the banks we will be able to bring a fair pricing strategy to the market," he said, adding that the CME is confident it will be able to "manage the process" of delivery and avoid long warehouse queues.

For its part, the LME is actively attempting to alleviate widespread warehousing issues in the United States, LME head of business development Matt Chamberlain said during the panel discussion. "All we can do at the LME is get better at price discovery and increased transparency within the market."

The LME’s effort to concentrate liquidity on a regional basis could see the launch of a physically delivered aluminum premium contract. The contract would replicate the current prompt date structure if preferred by the physical industry, according to the LME.

"If you have a regional contract you will have regional supply and demand imbalances. However, we are committed to introduce a (physical) regional contract that sits beside the LME global (futures) contract," Chamberlain said. "We are continuing to bottom out the requirements of the contract. Our view at the moment is that there is enough liquidity in the U.S. warehouses to support the regional contract."

Nick Madden, senior vice president and chief supply chain officer at Atlanta-based Novelis Inc., said transparency within the exchanges and their associated warehouses is paramount to the success of physical contracts on the CME and LME.

"The warehousing system, just in general for the LME, has all sorts of problems," he said. "Basically, there are four warehousing companies owned by people with a vested interest in the market. Overall, it’s a mess that needs to be fixed."

Madden said he "would like to see banks and hedge funds be required" to disclose their metal holdings within the warehouses, primarily to reduce widespread speculative trading. "I would like to see the hedge funds have to report what they have got, where it is and the value of the metal."

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