As price of aluminium continue to rise, LME adds new hedging feature

With the announcement of its new feature, LME has given the traders more number of options than before. Specifically, LME will give the aluminium traders ability to hedge the price of the metal due to the continuous rise in the price of metal as a result of lengthy delivery times.

This new contract will cover the aluminium traders in Western Europe, North America and Asia. There hasn’t been any date yet set for the contract but it seems a North American contract will start trading in May.

"The LME remains committed to addressing the underlying causes of queues, and do not believe that a premium hedging contract is a substitute for such action. However, given the likely timescale for queues to diminish at LME warehouses (including the potential delays arising from legal proceedings), a premium hedging contract may be of assistance to the market," said Matthew Chamberlain of the LME.

There has been a continuous rise in the prices of aluminium due to the longer wait times for physical delivery of the metal. In few cases, it has taken more than a whole year. It appears that US feels that there are two institutions that should be blamed: Goldman Sachs and JPMorgan. Last year, lawsuits was filed by the US alleging subsidiaries of these two giants leading to the rise in aluminium prices and long wait times for delivery.

Though these allegations have been denied by both the companies and there are a few LME officials who have defended them, the lawsuit is pending. In such a scenario, it seems the case will finally result in an out-of-court settlement.

Regardless of the fact the aluminium price has been fixed or manipulated, LME has taken the right step by introducing this new contract. This has opened up the doors for the traders to protect themselves better and it is expected that it will add liquidity to the market.