New Fastmarkets-settled alumina contract on the LME
The London Metal Exchange will launch its new cash-settled alumina contract on March 11, to be settled on the Fastmarkets MB index in a basket.
The contract will be settled against Fastmarkets MB’s benchmark daily fob Australia alumina index and CRU’s alumina price index – equal weighting given to each index.
Click on the image above to download the LME contract specifications.
The index moved to be priced on a daily basis, from weekly, in December 2017 to reflect mounting volatility in the alumina industry. Fastmarkets achieved type 1 IOSCO assurance for its alumina index in August last year.
“Fastmarkets’ significant presence in the LME’s alumina basket is testament to how well our index has adapted to a changing market and is increasingly referenced by the physical market since moving to daily pricing over a year ago,” Fastmarkets chief executive officer Raju Daswani said.
“We look forward to working with the LME and continuing to engage with the alumina market,” he added.
The alumina market was typically priced as a percentage of the outright aluminium price on the LME but contracts have since moved to being based on PRA indices, which better reflect the unique fundamentals of the alumina market.
Since this shift, Fastmarkets MB has gained significant traction in being a settlement option for more physical contracts in the market.
The new LME contract provides the market with a new hedging tool at a time of extreme volatility and allows for risk management across the aluminium value chain.
The index hit a high of $707.75 per tonne in April last year – its highest since Fastmarkets MB launched the index in August 2010. The rally pushed the index 71% higher than the level at the start of 2018.
Fastmarkets MB’s fob Australia index was most recently calculated at $394 per tonne on Wednesday January 16 – following recent deals for Australian material concluded at $375 per tonne and $385 per tonne earlier this week.
The escalation in prices was initially driven by market tightness caused by a force majeure at Hydro’s Alunorte alumina refinery but the tightness was heightened by sanctions against UC Rusal and strikes at Alcoa’s refineries in Western Australia.
Not only will the launch of a new alumina contract on to the LME allow risk management in times of extreme bullishness, it can protect companies from subsequent dramatic falls. Alumina prices are now 43% lower than they were at their peak in April.
The unprecedented amount of volatility in the market is set to lead a number of market participants to hedge on exchange contracts.
The CME also has a futures contract based on the Fastmarkets MB alumina fob Australia index.
[This article was updated on January 21 to correct the 2018 year-high alumina fob Australia price to $707.75 per tonne, from $703.75 per tonne as previously stated.]