LME launches four Al premiums contracts

The London Metal Exchange launched four aluminium premiums contracts on Monday November 23, enabling physical market participants to hedge the premium portion of the “all-in” aluminium price.

The London Metal Exchange launched four aluminium premiums contracts on Monday November 23, enabling physical market participants to hedge the premium portion of the “all-in” aluminium price.

The regions covered by the four premiums contracts are the USA, West Europe, East Asia and Southeast Asia, and they will allow participants to hedge the regional price of metal, including the premium portion, and ensure the metal they receive is readily available in a non-queue-bound LME warehouse.

“This has been an extremely customer-focused product launch, and we have collaborated with participants throughout the metals value chain to ensure we have created contracts that people want to trade,” the exchange’s ceo Garry Jones said in a statement.

Premiums reached a record high of $442 per tonne (on a duty-unpaid, in-warehouse Rotterdam basis) in November 2014, meaning a significant and volatile portion of the “all-in” price was unhedged by the physical market.

The LME contracts were being quoted at between $90 (East Asia) and $220 (USA) per tonne, at the time of writing.

The premiums contract will be traded across all LME venues, including in the ring, meeting the market’s stated desire for an exchange-discovered regional premium price, the bourse said today.

Demand for a premium-hedging tool was highlighted during the LME’s warehouse reform consultation, and was included in the bourse’s 12-point reform package announced in November 2013.

“We have worked extensively with the market on these products, which will allow users to fully risk-manage their exposure to regional market dynamics,” Matthew Chamberlain, head of business development at the LME, said.

The contracts are subject to a temporary fee incentive, where a trade on the bourse’s aluminium contract will allow market participants to trade one of the premium contracts for free.

The incentive is part of the exchange’s LMEselect Market Maker programme, which aims to provide initial liquidity to contracts at their launch.

The aluminium premiums contracts were launched alongside new steel rebar and steel scrap contracts, and are the first new contracts to be offered by the exchange in more than five years.

The launch also coincided with an upgrade to the exchange’s electronic systems, including trading platform LMEselect and real-time clearing LMEmercury, on November 23.

Charlotte Radford
Twitter: @CRadford_MB

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