Liquidity flows faster for aluminum swaps
Friday July 1, 2016
Aluminum swaps have come a long way since August 9th 2013, when the first lots on the CME’s MW US Transaction futures contract were reported to have traded. By the end of May 2016, open interest for exchange traded CME premium contracts stood at 27,890 lots [735,250 mt], up 194% on year. Swap contract trade rose further in June, with large volumes traded for H2 2016 and H1 2017. Midwest swap liquidity up 90% from May By the beginning of July, cleared open interest on the Midwest contract rose to 29,410 lots, excluding settled June contracts, with open interest for the Japanese contract rising above 2,000 lots for the first time. Throughout June, 7,905 lots were sold through the CME clearing mechanism across all Midwest swap contracts, a 91.31% rise from May volumes. The majority of interest was on the buy side of the contract, with some aggressive bidding on 2016 prompt contracts at under 7 cents/lb. 
The market has pointed towards a growing tendency towards incorporating swaps in hedging strategy. According to a trader, “liquidity has picked up across the board [and] premium levels have dropped so inevitably customers are locking in as part of their rolling hedge program,” adding that some large traders had gone short on large volumes with the expectation that premiums would go lower. While aggressive bidding has characterized recent trade movements, a second swaps trader said that Q3 and Q4 contracts would have to go significantly lower than the physical Midwest premium for larger volumes to be sold. “The swaps have to be consistently cheaper than the physical price as this will provide incentive for more consumers to lock in good premiums,” the second trader said. At the beginning of June, contracts settling in the second half of 2016 traded in the 7.40-7.60 cents/lb range, but had moved to 7 cents/lb by month end. While the most recent bid [June 30] for the July contract was at 6.90 cents/lb, lower bids further out in 2016 led the second trader to predict that the premium forward curve would move into backwardation. Compared with 2015, premiums were slightly higher wi...