INTERVIEW-CME expects aluminium premium swaps trades by end-year

Veronica Brown and Susan Thomas

* CME sees big interest from U.S. commercial sector

* Warehousing issue a big cost for consumers

* Lack of potential market makers a hurdle - source

LONDON, Oct 25 (Reuters) - CME Group expects to see the first trades in its new aluminium swap futures contract by the end of this year as it taps consumer frustration with having to pay steep surcharges to get metal in the midst of a glut, the exchange's head of metals said.

The contract is based on the Platts figure for the premium paid over the London Metal Exchange (LME) cash price to secure aluminium in the U.S. Midwest.

``All the feedback that we have shows it is of significant interest and use to the U.S. commercial sector and meets the need for them to manage their risk that no other contract today enables them to,'' Harriet Hunnable, managing director of metals products at CME, said in an interview.

The new product will be financially settled and cleared through the exchange, she added.

After losing out in the final stages of a year-long takeover battle for the LME in May, the CME has little choice but to challenge its rival if it wants to expand its share of the lucrative global metals market, dealers say.

The U.S. aluminium contract would capitalize on frustration with the LME's efforts to deal with its warehousing policy. Aluminium users are seething over the massive queues and record premiums tied to the LME's global warehousing system, despite an oversupply of the metal.

The problem originates with warehouses owned largely by JPMorgan, Goldman Sachs and Glencore, which are offering incentives and financing deals to producers and traders to store metal in their depots. The large volumes locked up in storage and LME rules that allow limited load-out rates are forcing end-users to pay up to secure metal.

Consumers' risk exposure is to the premium rather than to the underlying LME base price.

``Certainly we see that the problem with warehousing is a major factor and something that costs the consumers,'' Hunnable said.


An aluminium industry source said that while the CME's plan is credible, there is a lack of potential marketmakers to ensure the success of any premium-hedging instrument.

Some customers also might be reluctant to pay two sets of fees and margins - one on the U.S. exchange to hedge the premium and another to hedge the LME base price.

It also takes time for an exchange to build critical mass in the trading of a new contract. Trading volumes in iron ore swaps have grown since their 2008-2009 launch to around 100 million tonnes a year, but that still represents a tiny fraction of a physical market of more than 1 billion tonnes per year.

In the metals market, even so, investor and consumer interest in hedging aluminium premiums is growing.

Banking and senior industry sources said last week talks were underway on offering derivatives to hedge aluminium premiums in Europe and the United States.

``They can trade it and clear it onto CME Group; that's exactly what we're facilitating,'' Hunnable said. ``It's the commercial sector that has been the strongest supporter of this, and then banks and trading houses are coming on board.''

As competition heats up, the LME too is believed to be considering launching a facility to hedge the aluminium premium, industry sources said. But any new products would probably have to wait until after the launch of its self-clearing arm in 2014.

Some sources suggested that a premium-hedging contract would make sense for Europe too.

CME's London-based Europe arm is set to open for business by offering trading in currency futures early in 2013, but it plans to expand quickly into other asset classes including metals, meeting the LME on its own turf.

Hunnable would not provide detail on any plans for an aluminium hedging contract in Europe, while the company focuses on growing its U.S. contract.

``We're still open to our clients' need, but the U.S. market is a very big market and that premium has an international impact,'' she said.

Hunnable said that while the aluminium premium contract had not yet traded, the market conditions were right.

``I think that there are people with the capacity to develop that market,'' she said. ``I think all markets take time to get established, but the elements are right and it meets a real need.''

(Reporting by Veronica Brown and Susan Thomas; Editing by Jane Baird)