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RPT-COLUMN-CME turns up the heat on LME with new copper contract: Andy Home

RPT-COLUMN-CME turns up the heat on LME with new copper contract: Andy Home
From Reuters - November 22, 2017

(Repeats with no change to text. The opinions expressed here are those of the author, a columnist for Reuters.)

* CME aluminium premium volumes: tmsnrt.rs/2zXjZt5

* CME copper open interest and fund positioning: tmsnrt.rs/2AmRdTg

By Andy Home

LONDON, Nov 22 (Reuters) - CME Groups new copper premium contract, launched this week, is another sign of increased competition in the world of industrial metals trading.

The London Metal Exchange (LME) may still set the reference prices used by much of the worlds physical trade, but CME has been stepping up its challenge with a number of new contracts over the last couple of years.

This latest product is cash settled against Metal Bulletins assessment of the physical premium for Grade A copper delivered to Shanghai.

It mirrors the CMEs drive into the physical aluminium premium space and seeks to build on a recent surge in trading activity in its core copper futures contract.

It also exploits the failure by the LME and its Hong Kong owner, Hong Kong Exchanges and Clearing (HKEx), to open up the mainland Chinese market.

But China may be about to open itself up without any help from anyone else.

Indeed, if the Shanghai Futures Exchange (ShFE) succeeds with its own commodities trading experiment, the battle for global metals dominance may have only just begun.

Graphic on CME aluminium premium contracts:

tmsnrt.rs/2zXjZt5

GETTING PHYSICAL

CME will be hoping its new copper contract fares as well as similar products in the aluminium market.

Its physically-settled aluminium contract has struggled to gain traction, as have its lead and zinc contracts.

But the premium contracts, indexed against both Metal Bulletin and S&P Platts regional premium assessments, have done a lot better, even though the premiums overlay LME not CME contracts.

Volumes across the four CME aluminium premium contracts rose by almost 50 percent year-on-year in the first 10 months of 2017, while open interest was up by 36 percent.

The first, the US Midwest premium contract, was launched in 2013, a time of industry anguish about the disconnect between premium and underlying LME contract, a fragmentation of price that was widely attributed to the LMEs then problems with load-out queues in its warehouse system.

CMEs ability to exploit this discontent was facilitated by the LMEs own slow response and its subsequent launch of overly complex physically-deliverable premium contracts which have failed to trade.

Timing is everything in the new contracts game and the timing may be right for a China premium copper contract.

For several years spot Chinese premiums have traded at a discount to the annual terms for producer shipments.

This years producer premium for China was set at $72 per tonne, but Metal Bulletins assessment of the spot market averaged just $58.00 in the first 10 months.

This persistent spot premium discount has led to an increasing shift in pricing towards shorter-dated or even fully floating premiums, creating latent demand for a way of hedging that exposure.

Graphic on CME Copper Open Interest and fund positioning:

NEW FRIENDS IN EASTERN PLACES?

GOING OUT OR COMING IN?

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