LME's new steel, aluminium contracts attract scant interest

24 November 2015

The London Metal Exchange's new aluminium and steel contracts failed to attract much interest at their launch on Monday, highlighting the struggle they face to gain traction and liquidity.

The launch on Monday is a key element of a strategy by the LME's owner, Hong Kong Exchanges and Cleaning (HKEx) (0388.HK), to boost profitability at the 138-year-old exchange.

The new contracts in steel rebar <0#SRRF:>, steel scrap <0#SRRF:> and aluminium premiums <0#PAAF:> <0#PAEF:> <0#PAZF:> <0#PAWF:> went live nearly three years after HKEx bought the LME for $2.2 billion.

"If our customers want to trade any of these contracts, we'll put something up, but no one has asked yet. It's not an auspicious start," a metals broker said.

"We've got a customer who potentially would be interested if there was some liquidity, but that could take a long time."

The LME has selected two electronic market makers for the steel contracts to provide bids and offers from Monday. The exchange for now does not have any market makers for the aluminium premium contracts.

"We have received interest from a number of potential market-makers for aluminium premiums. However, the technical and governance processes needed to bring market-makers on board take time," a spokeswoman for the exchange said.

The new steel contracts are cash-settled and expected to be more successful than the physically deliverable steel billet contract launched in 2008.

Recent volatility may make the LME's new contract in aluminium premiums -- surcharges buyers must pay over the LME cash price CMAL0 for spot physical metal -- attractive.

But brokers say complexity of the aluminium premium contracts is a problem and they believe major sellers in the physical market will shun the contracts as the transparency could undermine their revenues.

"Eventual participation could well be a long path, but there's solid logic behind the need for these contracts," said Standard Chartered analyst Nicholas Snowdon.

"It's a market where there's price risk and the ability to hedge will be sought after by some participants."