(Reuters) — CME Group Inc. plans to launch a physically deliverable aluminum futures contract that could compete with the London Metal Exchange's $54 billion market, the latest sign that the years-long crisis over warehousing has emboldened rivals.
Harriet Hunnable, managing director of metals at CME Group, confirmed plans to move onto LME turf at a media briefing on Tuesday.
"Customers want a viable alternative to other exchange contracts on offer today," she said, adding progress on launching the contract was "very developed" and it would start in the United States.
"They want a physically deliverable contract in warehouse, and they want transparency that only CME can offer," she added.
The exchange has been quietly canvassing producers, traders and end-users on launching a competing contract for the past year.
The timing may be right as its London rival is under fire from end users such as MillerCoors LLC and Coca-Cola Co who use the metal for aluminum cans and are angry at its handling of warehousing policy.
Long wait times and incentives paid by warehouse operators, owned by Wall Street banks and big merchants, have distorted supplies and inflated physical prices even as the market is awash with an estimated 10-million tonne surplus, they say.
U.S., British and European regulators are now probing the issue and the exchange, Goldman Sachs Group Inc and Glencore Xstrata PLC are among those targeted in a series of class-action lawsuits.
The LME's new owners have announced a series of measures aimed at curbing wait times for users to take delivery of metal, placating the anger and protecting its stronghold in the global base metals market. But a coalition of aluminum users have said the measures don't go far enough.
TOUGH MARKET
But it may be even harder for CME to lure money away from a deeply entrenched benchmark, which took some seven years to win over producers after its launch in 1978.
There are very few examples of upstart commodity contracts dislodging a critical portion of liquidity from an established market.
The New York Mercantile Exchange (NYMEX), now owned by CME, struggled for 10 years to gain traction with a North American aluminum contract before being delisted in 2009. It was unable to lure established users away from London.
"It's a great time if they can ever pull it off," said a U.S. trader who has held discussions with the CME on its plans.
"But in reality what killed (the NYMEX contract) was nobody priced on it. I don't know how a contract survives if nobody prices off it," he said.
There are no other contracts to rival London's dominance.
The Shanghai Futures Exchange's (SHFE) aluminum contract accounted for just 1.1 percent of the combined LME/SHFE futures volumes traded in the first eight months of the year, according to Reuters calculations. The Chinese exchange is closed to many outside investors.
Market participants favor a physically deliverable contract, but stress that the exchange must also establish a warehousing policy that would prevent metal getting stuck in queues, market participants have said.
"They need to have a viable warehouse system so producers can deliver to it. Without it, there's no other game in town," said one industrial user.
In the United States, its COMEX copper contract has carved out a bigger share of the global copper futures trade, partly due to its monthly date structure which is popular with hedge funds and U.S. indices.
Some investors have also increasingly played the arbitrage between the London and the New York markets, further boosting trading volumes, traders said. Warehouses in the seven locations in its copper storage network have no queues.
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