London Metal Exchange Announces New Contracts as Competition Rises

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The London Metal Exchange is feeling the heat from rivals CME and the SHFE, it would seem.

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In an announcement last week reported by Reuters, the 141-year-old exchange advised it was introducing a plethora of new contracts to woo customers increasingly attracted by products on competitors’ platforms.

New technology at the LME is said to enable the exchange to introduce alternative products more cheaply and quickly than previously and encouraged it to try several cash settled futures options that, historically, fear of low liquidity would have barred.

The exchange is said to be introducing some 10 new cash settled contracts, including two regional aluminum premium contracts, minor metal molybdenum, plus options in gold and silver.

But the most interesting is probably a hot-rolled steel coil contract, with three regional prices covering Europe, North America and China, as opposed to the CME’s contract (which just covers North America based on the CRU Mid-West Index).

The LME’s reference index has yet to be announced, but it is hoped the exchange’s intended global coverage will attract more liquidity than the CME’s North American contract, which has struggled to gain liquidity since launch (although it has been widely adopted as an index price for steel supply chain contracts).

The other contract that raised some eyebrows is one for alumina.

Traditionally, alumina prices were fixed under long-term contracts and often tied to the primary aluminum price. But a few years ago, Alcoa broke with tradition and started pricing its alumina on the spot market, a move that many other refineries have since followed.

A largely spot market has resulted in considerable price volatility, aided this year by tight capacity and supply disruption. The LME’s timing could not be better, as a few years ago an alumina contract would have gone down like a lead balloon; today, the market may well respond positively to the opportunity to hedge price risk.

Achieving volume — and with it, liquidity — is about attracting the major producers and consumers. The aluminum contract, now the LME’s largest, struggled in its early days because the producers would not touch it, seeing it as a vehicle to undermine their pricing power.

Today, those same primary producers are on the receiving end of price volatility and may be more welcoming of a mechanism to hedge their input costs and output prices on the same platform.

In the cards for 2020 is a possible lithium contract, a metal that has been propelled from back page news to the front page headlines in recent years due to surging demand from batteries for all kinds of electronics, from iPhones to electric vehicles.

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The LME is rightly not rushing that one, as it is still a relatively immature market and one that entails a large proportion of mine to battery maker direct trade; a contract will take careful planning.

But resources the LME has in depth after 141 years are patience and experience.

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