The market has been ripe for CME to expand the physical delivery locations for the metals it trades in the wake of the last few years furor over long load-out queues at certain London Metal Exchange warehouses across the U.S. and Europe.
Should the CME Group add a physical trading ring with red couches? Source: London Metal Exchange.
If the CME had a wider network with more tonnage in storage five years ago then, arguably, some of the LME warehouse operators would not have been able to game the system to the extent that they did. The recent launch of zinc and lead contracts by the CME has presumably been a spur to add more locations. Zinc was added last year and lead followed earlier this year.
Yet, a new dynamism in the CME’s approach in recent years is also in evidence. The CME clearly has intentions to take on the older LME’s dominance of the physical trade market, particularly outside the CME’s home base of the U.S. Read more
Our Editor, Jeff Yoders recently reported on the launch of the CME Group’s new alloy 380 aluminum alloy contract, a product many in the domestic market have been eagerly awaiting and consider long overdue.
Historically, consumers would have hedged their alloy ingot requirements against the London Metal Exchange contract but as the LME’s aluminum benchmark became increasingly disconnected the casting industry all but boycotted the LME’s Primary HG contract, making the case for the CME to step in even more compelling.
From a high point in 2011 the LME aluminum alloy contract has plunged in popularity with volume down year after year.
Source: LME Data
Although nearly all traded volumes are down in recent years on the LME, aluminum alloy has fallen further than most. The exact reasons for the LME’s wider decline in volumes is a subject of some debate.
The ‘Right Trades
Reuters recently reviewed several reasons, one of them is the rise of activity on the Shanghai Futures Exchange. This year the SHFE has seen an explosion in traded volumes although not of the kind the LME would have welcomed. The SHFE volumes have been driven by highly speculative trades. Worse still, much of it is retail in nature.
This has the effect of distorting real price discovery and would undermine the foundation of the LME which was set up and has operated for a century or more on the basis of price discovery for producers, processors and consumers, not what many unfamiliar with the market have on occasion alleged, to speculate.
Increasing volumes on the CME pose more of a threat to the LME in terms of providing reliable price discovery and hedging for the trade, particularly in the North American market. Where the SHFE is so dominated by the speculative element, the CME’s cornerstone is more from trade participation… much like the LME.
Who Will Use the New Alloy Contract?
The CME’s aluminum alloy contract is not likely to garner support or participation from outside the North American market, but for consumers in the U.S. it should provide a welcome hedging and price discovery tool. Even if LME aluminum alloy volumes stabilize at current lower levels the CME, with a contract focused as it is on a specific part of the U.S. manufacturing base, has a solid role to play in the years ahead.
Iron ore, steel and non-ferrous metal markets in China — and by association the London Metal Exchange after opening — dropped following a decision by futures exchanges in Dalian, Shanghai and Zhengzhou to increase trading margins and fees. The most-traded contracts were down up to 4.6% in response.
Some Commodities Are Actually in Short Supply
Not all commodities dropped. Some experienced genuine supply tightness, such as coking coal wherein many of the domestic mines and ovens closed last year due to low prices, and bucked the reversal. Coking coal continued to rise and although iron ore did fall back. The fundamentals are a little more supportive following announcements by producers that they will limit output, but, in truth, even iron ore’s price increases are more due to speculative bullishness than a genuine tightness of supply. Read more
The London Metal Exchange‘s Hong Kong owners have seen revenues soar for the venerable metals exchange and Vale SA and BHP Billiton may have reached a deal with the Brazilian government over the deadly Samarco mine disaster.
LME Revenue Soars
The London Metal Exchangeposted a 36% jump in revenue for 2015 to $223.15 million, as higher trading fees and tariffs helped it offset a drop in volumes, its owner — Hong Kong Exchanges and Clearing Ltd.— said on Wednesday.
The revenue gains at its London unit were a key contributor to HKEx record net profit last year, showing the payback has begun from its $2.2 billion buyout of the 139-year old metals exchange near the height of the commodities boom in 2012.
Samarco Owners Reach Deal With Brazil
Samarco Mineracao SA will pay at least $5 billion over 15 years as part of a deal reached with the Brazilian government to settle a lawsuit for damages caused by a deadly dam spill at a mine in November, a government source told Reuters on Tuesday.
Both OPEC and LME are dealing with unexpected price stability this morning.
Oil Output Falls
Organization of Petroleum Exporting Countries oil output has fallen in February from the highest monthly level in recent history, a Reuters survey found on Monday, due to a halt in Iraq’s northern exports and outages in other producers.
The survey also found stable output in top exporter Saudi Arabia, an early sign that Riyadh is delivering on a Feb. 16 deal along with Venezuela, Qatar and non-member Russia to freeze output and support prices, which hit a 12-year low last month.
The London Metal Exchange on Monday confirmed that it will explore the idea of capping warehouse rent because the proposed rises from April are much higher than in previous years.
The LME said it plans to publish a discussion paper outlining its options on “Charge Capping” in mid-March. “The LME is proposing, at a minimum, to explore the possibilities for implementing a longer-term solution to high charges.
The London Metal Exchange (LME) launched three new contracts this week — LME Aluminium Premiums, LME Steel Rebar and LME Steel Scrap, the first new contracts to be offered by the Exchange in more than five years.
You can now hedge aluminum physical delivery premiums using an LME contract. Source: iStock.
The two steel contracts are cash-settled against physical Turkish scrap and rebar price indexes as opposed to the current steel billet contracts that are settled by physical delivery and have largely proved to be a failure since launch.
Why, we might ask, would these new contracts prove anymore successful? Well acknowledging the failure with billet, the LME has worked assiduously to garner industry support both in the shaping and specification of the new contracts. Goldman Sachs, for example, is on the LME’s steel committee and major trading firms like Stemcor have publicly stated they intend to be actively involved from day one, although they still add the caveat “subject to market conditions and liquidity.”
Liquidity was always a major issue for the billet contract. It never secured anywhere near enough interest from the trade to generate sufficient volume and, hence, a fair market price.
Rebar and Scrap
The steel scrap and rebar contracts will be traded on LME Select in small lots of just 10 metric tons making them more accessible for smaller market players, while, at the same time, the LME is offering discounts for volume trades to encourage liquidity. Read more
“Today’s announcement highlights the LME’s new approach to market engagement,” said Garry Jones, CEO of the LME. “This has been an extremely customer-focused product launch, and we have collaborated with participants throughout the metals value chain to ensure we have created contracts that people want to trade.”
The new scrap and rebar contracts will be traded on LMEselect, allowing industry participants to reduce their risk exposure by hedging more steps in the steel production process. The contracts are cash-settled against physical Turkish scrap and rebar price indexes.
The new ferrous contracts will be supported by market-making programs to optimize market depth and tightness of spreads.
With the physically settled aluminum premiums contract, participants can now hedge the regional all-in price to ensure the metal they receive is readily available in a non-queued LME warehouse at a convenient location
Mints have begun rationing sales of silver coins as supplies dry up due to low, low prices and the London Metal Exchange is set to launch its first contracts with position limits.
Silver Coins Running Low as Prices Fall
The global silver-coin market is in the grips of an unprecedented supply squeeze, forcing some mints to ration sales and step up overtime while sending US buyers racing abroad to fulfill a sudden surge in demand.
The US Mint began setting weekly sales quotas for its flagship American Eagle silver coins in July because it can’t meet demand, and the Canadian mint followed suit after record monthly sales in July. In Australia, the Perth Mint sold a record of more than 2.5 million ounces of silver this month, nearly 4 times more than in August, and has begun rationing supply of a new line of coins this month, a mint official told Reuters.
LME Premium Contracts Will Have Position Limits
The London Metal Exchange‘s new premium contracts, scheduled for launch in November, will come with position limits, a first for an LME contract.
Reuters’ Andy Home writes that the LME is proposing to give itself the authority to introduce position limits “as a general power rather than a power specific to premium contracts.”
With an eye on looming, broader regulation in financial markets, that represents a major shift in the way LME trading has been regulated. Position limits have long been anathema to a market that, as Home writes, “has come to epitomize Britain’s light-touch oversight of wholesale markets.”
The latest stocks report from the London Metal Exchange showed another 26,600 metric tons of zinc being warranted at the port of New Orleans.
That brings the cumulative inflow to a massive 228,225 metric tons since the start of August.
The deluge of metal has transformed the LME zinc stocks landscape, Reuters’ Andy Home writes. The total hit a low point of 426,875 mt on Aug. 6, at which stage exchange stocks were down by almost 264,000 mt, or 38%, on the start of the year. As of today that year-to-date decline has been slashed to just 73,500 mt.
Earlier this week the London Metal Exchangeannounced that its clearinghouse would now accept offshore Chinese renminbi as collateral, effective immediately. MetalMiner Editors and Co-Founders Lisa Reisman and Stuart Burns discuss the significance of this announcement but more important, its potential impact on industrial buying organizations.
For the first time, the LME will accept renminbi as collateral.
Lisa: Do you think this could mean that eventually metals are offered in a currency other than US dollars?
Stuart: I think that is still some way off for the main London market but the HKEx has run RMB-priced Asian mini metals markets for aluminum, zinc and copper since late last year in Hong Kong. This announcement by the LME now is about collateral placed by market participants for open positions. They are not suggesting London contracts will be priced in RMB.
Stuart: On one level there is the recognition of the RMB’s growing importance as an international (although we’d like to point out, not freely traded) currency and of China (and Chinese companies) importance as a major player in the global metals markets. On another level, it could also be seen as a political move. The LME is owned by the Hong Kong Exchanges and ClearingGroup (HKEx) and the key to unlocking fair value in their purchase of the LME was always their ability to open up China as a market for the LME’s services. Anything they can do to make the LME more accessible and more acceptable as a trading platform for Chinese companies is a beneficial step in that direction. Read more