CME throws down gauntlet to LME with new aluminum premium contract

The CME Group has taken another step towards challenging the London Metal Exchange's dominance of base metals trading outside China with a new European aluminum premium contract due to launch later this month.

The new 25-tonne contract will trade on the global CME Globex platform from Sept 21. The exchange's other aluminum (U.S) Midwest premium contract was launched in April 2012.

The new contract will start trading before the LME's four regional aluminum premium contracts are launched on Nov. 23. "The CME is trying to muscle in, get first mover advantage," said Robin Bhar, head of metals research at Societe Generale.

Premiums are paid over listed cash contracts to cover the cost of freight and insurance, for immediate delivery of metal. They have tumbled this year from record highs due to a surge of exports from the top producer China and rule changes such as new load-out requirements, which have seen more metal leaving LME-approved warehouses at a faster pace. Premiums for duty-paid material in Rotterdam were quoted at below $150 a tonne, down from a peak of $500 in November 2014.

"There'll be less appetite than 12 months ago when premia were at their peak," Bhar said, adding that the contracts would be useful should volatility return.

The idea for the new contracts was conceived a few years ago due to a disconnect between surging premiums and the reality of an oversupplied market due to long queues for aluminum in LME-registered warehouses. But premiums around the world have tumbled.

"The question is whether these contracts are required now given LME rule change. "It seems unlikely premiums can be squeezed up to the level we saw in the past," Macquarie analyst Vivienne Lloyd said. "That said, we understand from some consumers that they want the option to hedge the premium so it could get some traction."

The CME earlier this year announced the launch of a zinc future, another step in the battle for market share.