The settlement price for the monthly contract, to be launched on March 11, will be an arithmetic average of the daily Rotterdam duty-unpaid premium - the midpoint of the range - in the expiring contract month.
Fastmarkets achieved type 2 IOSCO assurance for its duty-unpaid Rotterdam premium in August last year.
Click on the image above to download the LME contract specification.
The introduction of the regional premium will provide the market with the ability to manage their price exposure on a single trading venue, since the LME also holds the global benchmark for the underlying aluminium price.
“Fastmarkets MB has been the uncontested benchmark for European aluminium contracts since 1997 and the new LME contract highlights how rooted our Rotterdam premiums are in the physical market,” Fastmarkets chief executive officer Raju Daswani said.
The call for more hedging tools to mitigate risk started in 2014 when market participants argued that European aluminium premiums encompassed too large of a portion of the all-in aluminium cash price, compromising the LME outright price and physical premium.
At the peak of the warehouse queue crisis at the end of 2014, when the Rotterdam duty-unpaid premium spiked to an all-time high around $420-440 per tonne, the premium made up more than 20% of the all-in price.
The desire for more hedging tools remains, now driven by one of the most volatile periods the physical European aluminium market has seen in years. Last year, sanctions on Russian producer UC Rusal pushed the Rotterdam duty-unpaid premium up to $150-165 per tonne, a level last seen in 2015.
The premium then hit a nine-year low of $55-65 per tonne by the end of 2018 following an announcement that the US Treasury intends to lift the sanctions.
The premium was last assessed at $60-70 per tonne on Wednesday January 16, but a firm contango in nearby spreads has pushed offers up to $80 per tonne in recent pricing sessions.
Volatile spreads have also driven market participants’ interest in hedging their premium price risk. LME aluminium prices have recently been vulnerable to wide backwardations that push down on premiums sharply.
In February 2018, the LME cash/three-month spread hit a $34 per tonne backwardation, which was the widest one in four years. Nearby spreads in January 2019 were also in persistent backwardation which have put pressure on the premiums early this year.
The CME launched its Rotterdam duty-unpaid futures contract in 2015.
LME to launch seven new contracts on March 11
The new London Metal Exchange cash-settled aluminium duty-unpaid European contract will be settled against Fastmarkets MB’s benchmark Rotterdam premium.