New CME Midwest Aluminum Swap To Offer Price Stability

Aluminum buyers will soon have a new commodity risk management tool at their disposal – the CME will shortly launch its Midwest Aluminum Swap futures contract. We view this as a huge opportunity for any buying organization sourcing semi-finished aluminum products within the United States.

The contract will begin trading on April 30. Today, many aluminum buyers rely upon the Platts Midwest ingot price, currently updated weekly. The Platts price reflects a surveyed premium over the LME HG settlement quotation. In practicality, it has served as the primary means for buying organizations to underpin physical aluminum supply contracts. The new CME contract will use the Platts index.

“This product launch comes at a good time,” said Jorge Vazquez of Harbor Aluminum. “Mid-west premiums are at a multi-year high and in practice, most consumers were not able to hedge the Mid-west premium and thus had open risk.”

What Becomes of the Platts Price?

In an email answer to MetalMiner’s question, Harriet Hunnable, CME Group Managing Director, Metals, said, “Platts will continue to publish their prices. Our U.S. Midwest Aluminum Swap Futures contract is cash settled and will utilize the Platts index for U.S. Midwest Aluminum just like our other swap futures with Platts, CRU and other index providers. When a deal is traded or cleared on CME the market will see CME’s end of day settlements data reflecting the current market forward curve.”

Our very own Stuart Burns had this to say about the new contract,

 Once sufficient liquidity is developed it will reflect a more representative price. Buyers and sellers will be able to financially hedge against the swaps price — they can’t do so against the Platts price. As buyers use the swaps price for contracts, the Platts Midwest ingot price will probably become just a weekly average of the swaps price — in contrast to what happened on the LME where they started with a futures market and have just developed an average of the month swaps market. The average of the week or average of the month prices still have a lot of attractions for the supply chain looking for some stability and a price they can use for both sides of their buy/sell. So I don’t see the Platts Midwest ingot price disappearing, but it will be interesting to see how they both get used going forward.”

Who Benefits from the CME Midwest Aluminum Swap

“The product will be suitable not only to The Americas who have a direct exposure to the premiums (Midwest is the basis for the entire continent), but we suspect some European/Asian/Middle Eastern players will find it of interest and value it as a proxy to hedge their premium exposure in other regions,” Vazquez has said.

Earlier this year, MetalMiner ran a two-part series on the LME swaps contract that provides additional background and insight on how swaps work. Readers can find Part One here and Part Two here.


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