LME Secondary Aluminium Alloy Futures, Setting A Global Benchmark
The LME first traded the current secondary aluminium alloy futures contract in 2001.
This contract offers producers and consumers an ideal vehicle for hedging price alongside the primary aluminium contract.
World production of recycled aluminium is around 8 million tonnes (2001 figures), and this consists of differing grades of aluminium alloy. The main producers of the recycled metal in a wide range of varying grades are USA (40%), Japan (15%) and Germany (8%).
You can now subscribe to the free Commodity Universe Ezine below, and get the latest articles on the commodity sector . Just your first name and email. It's as easy as 1-2-3! There is a growing demand for secondary aluminium against a backdrop of a wider environmental awareness and a strong push for more recycling of industrial metals.
Some of the major producers, such as Rio Tinto, have indicated that they see higher output levels of primary aluminium to meet the strong global growth in industrial metal consumption going forward. And growing demand from car manufacturers will likely lead to higher production of secondary aluminium in the future.
Since inception of this secondary aluminium contract the industry has come to accept LME official prices as a global price benchmark for the metal.
Unlike the other metal contracts, with secondary aluminium alloy futures it is possible to have more than one grade of the metal from recycling.
To ensure the contract meets the “good delivery” requirement, the LME uses three internationally recognised grades, which are those most likely to be used for automotive parts and equipment.
The aluminium alloy futures contract is quoted in US dollars with each lot being about 20 tonnes (+/-2%) and the alloy can be in the form of T-bars, large or small sows or ingots. Weights vary depending on the form, ranging from 4-25 kg for ingots to a range of 408 to 726 kg for the T-bars.
Contracts can be cleared in any one of the following currencies: US dollar, Japanese Yen, Euro or GB Pound.
In the nature of a futures contract it is unlikely that those trading them will take delivery, as they will liquidate the contract by buying or selling another contract.
The deadline for closing a position on the aluminium alloy futures contract is 12.30 pm on the business day before the prompt date.
Otherwise the unfortunate buyer would find themselves with say 20 tonnes of aluminium alloy on their front drive!
The physical secondary aluminium alloy is delivered daily for cash up to 3 months contracts. Every Wednesday for 3 m to 6m contracts, and every third Wednesday for 7 m to 27 m forward contracts.
Electronic or in the Ring? Trading can be either via a telephone service, electronic platform accessed via a member of the exchange or by open outcry in the ring.
You can get the very latest metal prices using the LME Live service, available on subscription.
The open outcry has very restricted times of trading, the first session in the morning and the second in the afternoon.
This is why you may sometimes see prices on the media outlets stating “unofficial” as they were taken before the second ring. There are also extended periods called kerb trading, one in each session after the second five minute ring period.
You will need to ask the LME member through whom you trade these contracts about the settlement date as it depends on when your trade was opened.
So it is not a simple matter of closing a trade in 3 month aluminium alloy contract after say 10 days. Take advice from the professional firm who provide you with the platform.
The market for secondary aluminium looks set to expand over the coming years with the demand pressure for more industrial metals to fuel economic growth in the emerging economies of Asia.
So it is reasonable to expect LME aluminium alloy futures to play a notable role in that growth going forward.
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