U.S. aluminum futures debut amid legal wrangling on London rules
Aluminum futures trading started on Monday on the CME Group Inc. in Chicago, a move supported by companies such as MillerCoors LLC that complained of price distortions cause by delivery delays at warehouses run by the London Metal Exchange.
The new futures contract will offer a “North American benchmark for managing price risk” on aluminum — with access to the metal at warehouses in Baltimore, New Orleans and Ypsilanti, Mich., according to the CME, which owns the world's largest futures exchange.
The London Metal Exchange, the biggest market for metals including aluminum and copper, received complaints over the delays and higher prices from MillerCoors, a beer brewing venture owned by SABMiller Plc, Molson Coors Brewing Co. and others.
The companies said that deliveries from warehouses take too long, distorting prices. The London exchange postponed new storage rules when a U.K. judge said the steps were “unfair and unlawful” after a lawsuit brought by aluminum maker United Co. Rusal.
The reforms were intended to reduce artificial backlogs that inflated the cost of the metal on the wholesale market.
The decision in March by the High Court of Justice in London involved mundane commodities exchange rules that governed how long warehouses could store aluminium lots before delivering them to customers.
The London Metal Exchange wanted warehouses that are part of its global network to keep aluminum off the market for no more than 50 days. Some warehouses were said to store metals for 100 days or longer, a practice that generated higher fees and inflated the cost aluminum users paid.
“A number of our customers have shown some interest” in the CME contract, said Michael Turek, a senior director at Newedge USA LLC in New York. “Everybody is taking a wait-and-see approach” to gauge liquidity, he said.
The time needed to withdraw aluminum from London Metal Exchange-linked warehouses in the Dutch city of Vlissingen increased to 22.5 months, Harbor Intelligence, a research company based in Austin, said in a report on April 2. Other complaints have come on deliveries from a LME-linked warehouse in Detroit.
The exchange has approved terminals in 38 locations in 15 countries, including the United States.
Experts said last year that the backlogs and other market-distorting practices by investment banks and speculators added an estimated 1 to 3 cents to every aluminum bottle or can.
“We know that it takes times for new contracts to grow and develop liquidity,” said Chris Grams, a CME spokesman.
The CME futures contract, which will combine the underlying price of aluminum along with a premium, will be a “potentially useful tool” to help eliminate many price issues, Tim Weiner, global risk manager at MillerCoors, said in March.
The premium is based on warehouse inventory levels, time in storage and transportation costs.
In London, the price for aluminum delivery in three months rose 0.1 percent to $1,786 a ton on May 2. The metal has dropped 1.4 percent in the past 12 months.
Bloomberg News and Trib Total Media staff writer John D. Oravecz contributed to this report.