CME Group to launch an aluminium contract to challenge LME

CME Group, the world’s largest futures exchange, will launch an aluminium contract to challenge the London Metal Exchange’s dominance of the largest base metals market as it suffers a storm of public criticism.

Harriet Hunnable, head of metals at the Chicago-based group, said its plans for an aluminium contract were “very progressed”.

“Customers want a futures contract that is a viable alternative to other contracts available today,” she told the FT on the sidelines of LME week, the largest annual gathering of the metals industry.

The LME’s aluminium contract – the global benchmark for the $90bn market – has been at the focus of a wave of criticism of the exchange due to long queues to take delivery of the metal from some of the exchange’s network of warehouses that have helped create a dislocation between the physical aluminium market and the LME price.

Alcoa, one of the top aluminium smelters, said in a public letter to the exchange that the LME price “no longer represents the fundamentals of the industry”; Rusal, the world’s largest aluminium producer, said a new rule proposed by the LME would lead to “diminished relevance of the exchange for industrial users”.

Ms Hunnable said that both investors and corporate users of the metals markets had approached CME to suggest it launch an aluminium contract. “They want the kind of price transparency that only CME Group can offer,” she said.

The move represents a direct challenge to the largest franchise at the LME, which was acquired only last year by Hong Kong Exchanges & Clearing for £1.4bn. Aluminium is the largest non-ferrous metals market and the highest turnover contract on the LME, accounting for about 40 per cent of trading volumes.

CME’s contract would be physically deliverable and mirror the LME contract in many ways, according to a preliminary specification sent to traders and seen by the FT. Just as on the LME, each contract would be for 25 tonnes, but unlike the LME’s daily contracts the CME contract would be monthly.

CME already has a network of warehouses in the US that underpin physical delivery of its copper contract. However, Ms Hunnable hinted that the exchange may expand its network for the aluminium contract: “It will be broader in region and participants than we have today.”

The LME contract has been used as a benchmark by the aluminium market for more than 20 years, as so-called “producer pricing”, whereby producers set fixed prices for the metal, lost traction when the break-up of the Soviet Union created a flood of aluminium on the global market. CME’s subsidiary, the New York Mercantile Exchange (Nymex) has attempted in the past to break into the aluminium market, with little success.