The CME Group is confident that its aluminum swaps contract will see its first trades by the end of the year, if a Reuters interview with the CME’s managing director of metals products Harriet Hunnable is anything to go by.
While Hunnable asserts, to a degree, “if you build it, they will come,” skeptics say that “while the CME’s plan is credible, there is a lack of potential marketmakers to ensure the success of any premium-hedging instrument,” according to the report.
The report also points out that some customers also might hesitate when “double-paying” fees and margins — one to hedge the premium and another to hedge the LME base price.
For another perspective, I caught up with MetalMiner co-founder and contributing editor Stuart Burns.
Q: From a commodity risk management standpoint, will hedging with this new contract really solve the issue of buyers dealing with high premiums?
Stuart Burns: I really cannot say with any confidence if it will help with the premiums. On the face of it, I don’t see why it would — a swap doesn’t really get around the premium for obtaining metal in a particular physical location. The CME may argue otherwise, but I am yet to be convinced.
Q: How long will it take for the contract to build critical mass? In other words, are there enough “marketmakers,” as Reuters puts it, to make it worthwhile?
SB: Depends on your definition of ‘critical mass.’ Arguably, it has taken the Asian iron ore swaps market since 2009 to reach something like widespread acceptance by the trade — that’s some three years. It now realistically represents the spot market and has something approaching a significant percentage of the physical market volumes — maybe 15 percent — to be said to fairly reflect what’s going on. Most importantly, maybe producers, consumers and traders have [finally] started turning to the market to hedge risk; prior to this year that was limited.
Q: How can the LME aluminum warehousing crisis, which is making way for these new contracts, possibly be resolved?
SB: On the warehousing market, the only solution I can see — and take this with a pinch of salt — is for the LME to change its rules and force the warehouse operators to deliver more quickly from store. The high physical premiums and the restricted warehouse delivery rules are linked. I don’t see swaps changing that in the short term, so I think the LME has to get its house in order on this or it risks having its reputation as the price-setting market sullied by allowing the few to manipulate the many.