Aluminum Premium Volatility and Risk: CME Group to the Rescue?

commodity risk management

The aluminum sourcing practice we outlined here in Part 1 will likely save some aluminum buyers some money, but it fails to address a far more significant issue – the percentage of current non-hedgeable volatility that has seeped into the “metal cost” portion of the equation.

Back when the Midwest (MW) aluminum premium averaged $0.0476/lb (between 2001-2010, according to Alcoa Inc.) and back when aluminum markets worked efficiently and without price distortion, an industrial buyer could mitigate nearly all of its metal price risk with a simple hedge on the LME.

But today, with the MW premium at $0.21/lb, and facing heavy volatility – about 25% of the total metal cost remains at risk.

CME to the Rescue?

MetalMiner has a scoop on what the CME Group plans to do about this.

As we have previously reported, the CME will launch an “all-in” physically delivered aluminum contract this year. At a minimum, the contract will initially be for North American deliveries.

The CME has confirmed with MetalMiner that the contract will leverage the rules and best practices for similar base metal contracts that involve physical deliveries to warehouses, such as the Comex copper futures contract.

Market participants have told MetalMiner that the maintenance margins will also be lower than that on the LME and other exchanges.

In other words, the CME fully intends to offer a competitive, more efficient physically delivered contract. It may also have the ability to avoid the current LME warehouse situation.

FREE Download: The Monthly MMI® Report – covering the Aluminum market.

What This Means for Metal Buyers

If the CME chooses to use 25 metric tons like its AUP contract, or some other contract size, any buyer with that volume can take advantage of the contract – small, medium and obviously large industrial buyers could take advantage.

We know this already happens with the Comex copper contract, as small scrap players come in for a contract at a time. Whatever the lot size is, that’s the minimum.

To stay informed of additional details on the CME aluminum contract, kindly complete the form below and MetalMiner will notify you of details as soon as they become available:

Don’t forget MetalMiner has aluminum price forecasting capability to help your metal sourcing efforts.

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