Liquidity surges at $290/t for 2020 on Fastmarkets-LME alumina contract
The London Metal Exchange’s cash-settled alumina futures contract, which is settled against a basket of prices that includes Fastmarkets’ index, has seen a flurry of activity on the January 2020 prompt date.
Four trades had taken place as of 11am London time on Wednesday November 27. Three separate trades of 10 lots on the January 2020 date at $290 per tonne, while another 10 lots traded for May 2020 also at $290 per tonne.
“Over the past two months we have been seeing increasing interest in this contract and we anticipate that this will continue to grow in 2020,” Darren Rees, corporate LME sales at broker Marex Spectron, told Fastmarkets.
This follows earlier activity on Tuesday for the January 2020 prompt date. A deal of 20 lots and a second of 10 lots also traded at $290 per tonne.
A total of 70 lots have traded over the past two days. A lot is equivalent to 50 tonnes.
“The Global Team at INTL FCStone are delighted to have concluded the inaugural trade on the new LME alumina contract. Our customers are showing a growing appetite for risk management in this product area which is evidenced across our extensive geographic footprint,” Kevin Tuohy, co-head of base metals at INTL FCStone told Fastmarkets.
“The ability to access appropriate risk management solutions in this area is a big step forward for the aluminium industry at large. The exchange has put a lot of work in to offer a viable hedging tool and we look forward to much increased activity in the future,” he added.
Alongside the four trades, there were also very tight bid-offer spreads on other prompt months. February 2020 had 20 lots bid at $288 per tonne and 20 lots offered at $292 per tonne. For March 2020, there was a bid-offer spread of just $5 per tonne.
“We are encouraged to see momentum grow in LME alumina – volumes are picking up, bid-offer spreads are tightening and participation, particularly from physical players, is growing.” Robin Martin, head of market development at the LME, said.
The LME launched the contract in March, settled against Fastmarkets’ benchmark daily fob Australia alumina index and CRU’s alumina price index - equal weighting is given to each index.
In October, the first trade was completed with 10 lots at $284 per tonne for November 2019. There were also two separate trades on the January 2020 contract at $294 per tonne for 10 lots each.
The LME contract provides the market with a new hedging tool during times of extreme volatility.
Fastmarkets’ daily alumina index, fob Australia is at its lowest since early May 2017 at $274.84 per tonne as of Tuesday November 26.
The current index level has fallen by 30.6% since the start of 2019, when the index stood at $396.24 per tonne, due to weakened demand and a wide availability of cargoes.
The fall in the alumina price has been steadied slightly by demand from China – Chinese buyers have been consistently picking up Western Australian cargoes for the past few months.
“If it wasn’t for China I think our prices would be a lot worse off and we could have fallen below $270 per tonne a lot quicker. The market is still volatile to dramatic swings,” a trader said.
The alumina price is down significantly from last year when it reached record highs due to tight supply, caused by production curtailments at Norsk Hydro’s Alunorte alumina refinery.
“Alunorte is still going to be on people’s minds. It really did ruin some margins and that’s why some will be happy to lock some futures in,” a consumer said.
At the height of market tightness in April 2018, the fob Australia alumina index hit a record high of $707.75 per tonne. Prices are now 61.2% lower than this peak.
Market participants told Fastmarkets alumina prices could be put under further pressure next year from more supply and some consumers investing in their own refineries to lower their exposure.
EGA’s new refinery in Abu Dhabi started production in April and is expected to produce more than 2 million tonnes of alumina by 2020, enough to meet 40% of its alumina needs. Meanwhile aluminium producer Press Metal acquired 25% of Bintan Alumina Indonesia earlier this month to secure a long-term supply of alumina.