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INTERVIEW-LME looking to launch U.S. aluminum premium contract

Josephine Mason
Sunday, 12 Jan 2014 | 11:53 PM ET

FORT LAUDERDALE, Jan 12 (Reuters) - The London Metal Exchange is considering launching a U.S. aluminum premium contract, a senior executive said, potentially expanding its most-traded product after years of criticism over high physical prices.

The contract, plans for which are still in the early stages, would reflect the cash premium that is paid on top of the LME benchmark for physical delivery, Matt Chamberlain, head of business development, told Reuters.

The draft specification will be ready by month-end, at which point the LME will start to canvass the market for support. If liquidity grows, the exchange would expand it to include forward transactions, he said.

The plans emerge just as premiums <AL-PREM> spike to record highs, now accounting for as much as a quarter of the LME price. Historically it has been around 10 percent.

The surge has added to complaints that the LME's mainstay contract is broken because of the yawning gap between the futures and the physical market.

The new product would initially be for delivery in the U.S. Midwest, the heart of the country's aluminum industry and where the need is "most pressing", Chamberlain said on the sidelines of an industry event.

It would also compete with CME Group Inc.'s struggling Midwest aluminum premium contract. Its Chicago-based rival is also looking at launching a physically deliverable aluminum futures contract.

News that the LME is pursuing a premium contract comes just months after it pledged to investigate new products linked to physical premiums, warrant transfers and synthetic warrants.

The speed of the LME's action will underscore its efforts to repair damage to its biggest futures contract by turnover and liquidity.

ALL-IN COST

The new product would allow U.S. end users, such as carmakers and brewers who use aluminum to make drinks cans, to hedge the "all-in" cost of buying a tonne of aluminum.

It would be similar to a swap, whereby buyers and sellers trade a product and the buyer pays the difference between the U.S. Midwest and the other region.

"The auto companies are already going to their brokers saying we need a price for all-in metal. The end users do have access to it with trading relationships but they would like to see a displayed price," he said.

The exchange may eventually look at expanding the contract to Europe for delivery in Rotterdam and Asia - Japan and Taiwan - if there was sufficient interest liquidity, he said.

It would also consider expanding it to other metals in time.

Under pressure to appease critics of its global storage network and facing intense regulatory and political scrutiny, the LME will introduce measures in April to slash the maximum queues for metal and has beefed up its powers to act against market abuse.

It is unclear if there would be enough support for the contract. U.S. producer Alcoa Inc. has given its backing to a premium product, but Chamberlain said the LME would only push ahead with the plan if there was enough backing from the industry.

"This is something we'll develop if there's a real business case for it."

(Editing by Jonathan Leff and Joseph Radford)