Clock ticking for CME aluminium contract, industry expert Bodner says

CME Group has a window of just a few months to establish its new aluminium contract before the opportunity is missed, industry consultant Mark Bodner told Metal Bulletin.

“CME rightly sees an opportunity,” Bodner said. “A launch before year-end will give a much better chance of success than if it’s delayed beyond that.”

Bodner was an aluminium trader at Gerald Metals in 1978 when the London Metal Exchange launched its aluminium contract, and became one of the largest users of the first Comex aluminium contract in the mid-1980s. He later spent 13 years as sales director at United Co Rusal before opening his own consultancy.

The opening for a competing CME aluminium contract stems from the investigation into LME warehousing by the Commodity Futures Trading Commission (CFTC) and the lawsuits filed against the LME and warehouse owners by US consumers, Bodner said.

“It’s mainly the litigation, but also a great deal of investigations and subpoenas by government entities against those banks and traders that own the warehouses,” he said. “The battle lines have been drawn between the US consumers, and the LME and the warehouses,” he added.

Aluminium consumers, such as Coca Cola, Anheuser Busch, MillerCoors and Novelis, have all been vocal in their opposition to what they allege has been manipulation of the aluminium market through the hoarding of metal in warehouses. Furthermore, Bodner believes the LME and the warehouses will not easily shake off these lawsuits.

Not only have consumers lost faith in the LME as a source of metal – a recent swap offer by Goldman Sachs revealed that no consumers are sourcing metal via Metro’s Detroit sheds – but the law firms employed in the actions are also major players.

One is Lovell Stewart Halebian Jacobson, whose early successes include $145 million in recoveries on price manipulation claims under the Commodity Exchange Act, including a settlement in litigation related to the Sumitomo copper scandal of the mid-1990s.

“You have multiple law firms that are highly experienced and have great records [acting] on this case,” Bodner said. They are not new to this, they have deep pockets, they fight like Superman, and they have all the consumers on their side.”

Although Goldman Sachs and the other defendants have defended themselves by saying that no rules have been broken, Bodner said that this defence has little chance in a US court.

Should the LME take measures next year to assuage consumers’ concerns and head off the US investigations – and the proposed changes to load-out rates are a large step in that direction – then it will be all but impossible to pry away enough liquidity to create a successful CME aluminium contract.

“If CME strikes while the LME is under fire, it will probably attract liquidity and market participants to try using the contract in the USA,” Bodner said.