CME to launch aluminium contract in May to rival LME

* CME aluminium contract to be physically deliverable

* CME sees contract as "robust and significant" in 2-3 years

* MillerCoors sees contract as "a potentially useful tool" 

LONDON, March 18 (Reuters) - CME Group Inc will launch a North American physically deliverable aluminium futures contract in May that could compete with the London Metal Exchange's (LME) $54 billion market.

The move comes after the LME has implemented sweeping reforms to its metals warehousing system after a years-long crisis that has undermined its own aluminium futures contract.

"We have had a high level of engagement from major market participants, as well as smaller players, who are looking for an alternative to the exchange contract they have today and who want to be able to manage price risk," Harriet Hunnable, managing director of metals at CME Group, told Reuters.

Hunnable said a CME team had been signing up participants for months, and that in two or three years it will be "robust and a significant size". The new contract will begin trading on May 5, pending regulatory approval, she said.

CME said in October it would launch the contract and has been canvassing producers, traders and end-users for months.

The new contract has the approval of at least one large consumer of aluminium, MillerCoors, which uses aluminium to make drinks cans.

"It's one of the single largest commodity price risks we face today as a company and an industry," Tim Weiner, MillerCoors global risk manager, said in the CME's statement.

"We see this North American aluminum contract, which will combine both the underlying price of aluminum along with the premium, as a potentially useful tool to help us eliminate many hedge accounting issues."

JPMorgan Chase & Co's Henry Bath unit, Scale Distribution, part owned by Australia's Macquarie Group , and C Steinweb have applied to be warehousing firms in three different cities for the new contract.

If approved, Henry Bath will be in New Orleans, Scale Distribution will operate in Ypsilanti, Michigan and Steinweg in Baltimore, the CME said in a notice to members following the announcement.

Ypsilanti is near Detroit, the focus of regulatory and legal scrutiny in a long-running controversy over the LME's warehousing policy.

Long wait times and incentives paid by LME-registered warehouse operators, owned by Wall Street banks and big merchants, have distorted supplies and inflated physical prices in a market awash with an estimated 10-million tonne surplus, metals consumer and manufacturers have said.

U.S., British and European regulators are now investigating the issue and the exchange, Goldman Sachs Group Inc and Glencore Xstrata PLC are among those targeted in a series of class-action lawsuits.

NEW MEASURES

The LME's new owners, Hong Kong Exchanges and Clearing will implement a series of measures on April 1 aimed at curbing wait times for users to take delivery of metal, placating users and protecting its stronghold in the global base metals market.

Some aluminium users have said the measures do not go far enough while Russian aluminium producer Rusal says it goes too far.

Rusal is seeking court permission for a judicial review, hoping to quash the LME moves it says may undermine the price at which the company sells its products.

Still, despite the uncertainty over the LME's warehousing revamp, the CME might find it hard to lure money away from a deeply entrenched benchmark, which took some seven years to win over producers after its launch in 1978.

There are very few examples of new commodity contracts dislodging a critical portion of liquidity from an established market.

The New York Mercantile Exchange (NYMEX), now owned by CME, struggled for 10 years to gain traction with a North American aluminium contract before delisting it in 2009. It was unable to lure established users away from London

Is Dr. Copper diagnosing impending disaster or temporary indigestion?

The more China-leveraged metals, copper in particular, have suffered an early-year sell-off: prices are down 14% from this year’s high, while the LMEX, a basket of LME metals, is down only 8%, said Barclays in a snippet. China’s first bond default has triggered fears that the country’s financial sector clampdown will force copper inventories to be liquidated since imports have been used to be turned into credit.

 

Huge portions of early 2014’s commodity imports were used to generate financing after the December “cash crunch”, and without strong underlying demand, inventories soared. Copper market sentiment turned bearish in January, and China’s copper indicators have not looked healthy. The price differential between London and Shanghai has been deeply negative, the premium that buyers are willing to pay has fallen, and inventories have been rising fast. However, Barclays thinks fears that China’s financial sector clampdown will force copper inventories to be liquidated are overblown, though financing flows will likely fall, which means Chinese copper imports would weaken from early-year highs.

 

Taken in a wider context, Barclays thinks it would be positive if China stopped importing more copper than it needs. It would help to chip away at bulging inventories, especially if it coincided with a seasonal pick-up in demand in Q2. Feedback from our meetings in China last week suggests that the worst may be over (or close to it) and that end users, such as power cable makers, have very low raw material inventories, so physical buying could accelerate quickly if industrial activity normalises.

 

Barclays also thinks macro concerns and stock overhang take some of the potential upside off their Q2 forecast of $7,300/t. However, the recent sell-off looks overdone, in our view, since micro trends have likely bottomed. It reminds us of 2013, when copper prices sold off in Q2 due to China hard landing fears, only to bounce back when Chinese demand surprised to the upside. Our economists believe Q1 14 marks the nadir for Chinese growth and forecast a strong sequential pick-up over the next few quarters. If the government again leans on targeted investment to protect growth, it would be positive for metals demand. With that, we expect more volatility this year and think the risk/reward of buying copper at these lows is attractive.

Yuan Tumbles To 11-Month Lows As China Home Price Growth Slows

It would appear that the widening of the daily trading bands (we discussed last night) are having a directional effect on USDCNY as the devaluation continues on the back of forced carry-trade unwinds. At 6.19, CNY is its weakest in 11 months (2.5% weaker than its lows in January) and the last 2 months have seen by far the biggest weakening in the currency on record. This 'implied' easing is modestly supporting the stock market and copper for now (though we suspect that is more spillover from risk-on squeezes post-Ukraine). While Goldman and BofA are adamant that widening the bands will not mean a change in trend overall, it seems clear that hot money is outflowing and driving a trend change anyway ascorporate bond prices are not rising and home-price appreciation is slowing in the major cities.

USDCNY drops 100 pips to 6.19 - lowest in 11 months...

Chinese home price appreciation slows notably... (h/t @M_Mcdonough)

Weekly Economic Data for the week 15-Mar-14 to 21-Mar-14

Data for the week 15-Mar-14 to 21-Mar-14

Date	Time (IST)	Country	Data	Exp.	Prior	Exp. chg today	Avg. chg of last 1 year	Exp. Impact on Price
17-Mar-2014	02-00 PM	European Monetary Union	EU Foreign Ministers Hold Meeting in Brussels
17-Mar-2014	03-30 PM	European Monetary Union	Consumer Price Index (MoM)	0.4%	-1.10%	1.50%	0.65	Very Good
17-Mar-2014	03-30 PM	European Monetary Union	Consumer Price Index - Core (YoY)	0.8%	0.8%	0.00%	0.05	Neutral
17-Mar-2014	06-45 PM	United States	Industrial Production (MoM)	0.2%	-0.3%	0.50%	0.97	Neutral
18-20 Mar-2014	--	United States	Federal Reserve FOMC Meeting
18-Mar-2014	06-00 AM	Australia	RBA Releases Policy Meeting Minutes of March Meeting
18-Mar-2014	03-30 PM	Germany	ZEW Survey - Current Situation	52	50	2.00	5.46	Neutral
18-Mar-2014	03-30 PM	Germany	ZEW Survey - Economic Sentiment	52	55.7	-3.70	12.25	Neutral
18-Mar-2014	03-30 PM	European Monetary Union	Trade Balance s.a.	€13.9B	€13.7B	0.20€	2.05	Neutral
18-Mar-2014	06-00 PM	United States	Consumer Price Index (YoY)	1.2%	1.6%	-0.40%	0.25	Bad
19-Mar-2014	03-00 PM	United Kingdom	ILO Unemployment Rate (3M)	7.2%	7.2%	0.00%	0.07	Neutral
19-Mar-2014	03-00 PM	United Kingdom	Bank of England Releases Minutes From Mar 5-6 Meeting
19-Mar-2014	08-00 PM	United States	EIA Crude Oil Stocks change		6.180		3.45
19-Mar-2014	23-30 PM	United States	FOMC Rate Decision	0.25%	0.25%	0.00%	0.00	Neutral
19-Mar-2014	11-30 PM	United States	Fed QE3 Pace	$55	$65	-10.00
20-Mar-2014	00-00 AM	United States	Fed's Yellen Holds Press Conference in Washington
20-21 Mar-2014	--	European Monetary Union	EU Leaders Hold Summit in Brussels
20-Mar-2014	07-30 PM	United States	Existing Home Sales (MoM)	4.62M	4.62M	0.00M	0.16	Neutral
20-Mar-2014	08-00 PM	United States	EIA Natural Gas Storage change		-195		33.60
21-Mar-2014	03-30 PM	European Monetary Union	Consumer Confidence	-12.3	-12.7	0.40	1.04	Neutral

Half-mln tonne zinc position sparks jitters about hidden stocks

* One party has huge short position on LME

* Physical delivery to expose hidden stocks

* Bullish case for zinc undermined by large stocks

By Eric Onstad

LONDON, March 14 (Reuters) - Metals markets are nervous that nearly half a million tonnes of hidden zinc may be delivered on the London Metal Exchange next week, shaking a market unsure about the extent of further concealed stocks.

Investors who had bought into a bullish story about zinc may be particularly concerned since the appearance of the unforeseen inventories could weigh on prices of zinc, the top LME performer last year.

LME zinc stocks have declined by a third over the past 12 months, encouraging bullish investors, but analysts are uncertain about how much more inventory is stashed away in off-exchange depots in financing deals.

"It's a very real risk that we do see a very big physical delivery onto the LME at some point over the next week," said analyst Gayle Berry at Barclays in London.

"There has been, we think, a large accumulation of unreported zinc inventories, which could be mobilised to deliver against a large short futures position."

Barclays estimated that last year alone, about 600,000 tonnes piled up in unreported inventories while BMO Capital Markets this week cited reports that up to 1 million tonnes of hidden stocks are stashed away in Chinese bonded warehouses.

Unease on the market revolves around a huge short position on the LME March contract that accounts for at least 40 percent of futures for that date, according to LME data <0#LME-FBR>.

Based on open interest data, the position is equivalent to at least 448,020 tonnes, worth $881 million at the current price of the March contract of $1,966.50 a tonne.

EYES ON WEDNESDAY

The March contract matures next Wednesday, when short position holders either have to deliver physical metal, roll the contract forward or close it by buying equal amounts of futures.

Buying such a large amount of futures at the last minute would be difficult so if the short holder wanted to close out or roll, it would have likely already taken action, analysts said.

There have already been some 70,000 tonnes of deliveries over the past week into the LME New Orleans warehouse, the dominant location for zinc.

The reversal from withdrawals to deliveries has started ringing alarm bells, especially when investors looked at the potential for more deliveries by the short position holder, highlighting the issue of hidden stocks.

Zinc, mainly used to protect steel from corrosion, was the top performer last year on the LME and jumped nearly 9 percent during the month before arrivals began appearing in LME data.

The bullishness was due to views that the closure of large mines was tipping the supply-demand balance from surplus into deficit and the persistent stock declines was evidence of this.

"It (recent stock increases) perhaps suggests that the decline we were seeing in warehouse stocks was a little bit of an over exaggeration in the extent to which the zinc market is already in deficit," said Nic Brown, head of commodities research at Natixis.

"We believe the market is in a small deficit but it's not quite as aggressive a shortage as we may have perceived it to be by looking at the (previous) movement in warehouse stocks."

The LME does not identify large position holders, but some industry sources said commodity powerhouse Glencore-Xstrata is a clear possibility.

The trading and mining group is not only the biggest producer of zinc ore, but has interests in smelting and marketing of the metal.

When the group listed in 2011, it said it had control over 60 percent of the internationally tradeable zinc market in metal and 50 percent in concentrates.

Glencore's warehouse unit Pacorini is the biggest operator in zinc hot spot New Orleans, owning 60 percent of depots there.  

While taking a short position might go against Glencore's position as a producer, it is also known as a canny trader.

"If Glencore's trading business was of the view that market dynamics were likely to drive prices for a commodity down, they might well look to trade on that in order to profit from it. That's a cultural difference between Glencore and many other (mining) companies," an industry source said.

The short position might dovetail with some of their positions in other areas of the production chain, another source said. "They have such a substantial position in the zinc markets so they have many options..."

A Glencore spokesman was not immediately available for comment.

Copper prices below $5,000 could threaten Zambian mines - minister

Zambian mines are still operating profitably despite the fall in copper prices but could be threatened if the price dropped below $5,000 per tonne, Mines Minister Christopher Yaluma said on Saturday.

 

Copper markets have been edgy over slowing Chinese demand and fears that credit upheaval in the world's second-biggest economy could unwind financing deals using the metal as collateral.

 

Benchmark three-month copper on the London Metal Exchange has been falling steadily since January and sank to a 44-month low of $6,376.25 on Wednesday.

 

"Whatever they are making now is within very profitable levels. The worst case scenario they have planned for is falls below $5,000 and I don't think prices will reach that level," Yaluma told Reuters.

 

"They would only be threatened if prices fell well below $5,000."

 

Zambia produced 915,773 tonnes of the red metal between January and November 2013, up from 755,359 tonnes in the corresponding period of 2012.

 

Exports of the metal are a key supplier of Zambia's hard currency and the falling prices have brought the local kwacha currency tumbling nearly 10 percent so far this year.

 

 

Analysts polled by Reuters in January expect global surplus stocks of copper to tighten significantly this year and next as new mine output fails to translate into refined metal.

Crimea Names Ruble Currency; Applies To Join Russia, Expects To Become Russian Federation Region By Thursday

First, for those who have missed this weekend's developing story surrounding events in Crimea, here is the 30 second summary, courtesy of Bloomberg:

• U.S., EU warn Russia not to annex Crimea after 95.5% of voters backed leaving Ukraine to join Russia in referendum.
• Ukrainian govt, EU, U.S. consider vote illegal
• Russia said vote  “fully met international norms”
• Russia deployed about 60,000 troops along Ukrainian border, Ukrainian government said yday; Ukraine closed border crossings and will mobilize as many as 15,000 volunteers in next 15 days
• Obama spoke with Putin, said referendum would never be recognized by intl community; U.S. prepared to impose “additional costs” on Russia for its actions
• Putin told Obama Kiev regime unable to curb radical, ultra- nationalists groups that are destabilizing situation, terrorizing peaceful residents
• EU ministers meet today to discuss sanctions that target Russian individuals rather than businesses; EU leaders to meet March 20-21 in Brussels to discuss further measures
• “We are all reluctant to impose sanctions because Russia will probably respond and we’ll all suffer as a result,” Poland Foreign Minister Radoslaw Sikorski said on CNN. “But Russia is leaving us with no choice.”
• Russian lawmakers to consider bill on March 21 that would allow Russia to incorporate parts of countries where residents want to secede, says a Kremlin adviser
• Russia vetoed UN Security Council resolution declaring referendum illegal; China abstained from voting
• Crimeans celebrate vote

And here is the latest : just hours ago, Crimea's parliament officially applied to become part of Russia. The parliament "made a proposal to the Russian Federation to admit the Republic of Crimea as a new subject with the status of a republic," according to a statement on its website. A Crimean parliamentary delegation was expected to arrive in Moscow on Monday to discuss the procedures required for the Black Sea peninsula to become part of the Russian Federation.

"If everything’s signed we’ll become a fully fledged region of the Russian Federation Wednesday or Thursday,” First Deputy Prime Minister Rustam Termigaliyev says in interview at govt headquarters in Simferopol. Termigaliyev added that Crimea will promptly get $1b aid from Russia in near-term, and that Hryvnia reserves enough for 10 days, then Crimea will switch to ruble. April pensions “most likely” to be paid in rubles. Crimea can be self-sufficient in natural gas after today’s nationalization of Chernomoreneftegaz. Crimea risks 150,000 hectares being left without water if Ukraine shuts off supply, though that’s “not critical,”  says Termigaliyev.

In other news, the west continues dithering and considering just how best to telegraph to the world that it is completely helpless in stopping the annexation of Crimea, which is now a fact, and that it is praying that Putin does nothing to annex any of the other Pro-Russian cities in east Ukraine in the coming days, as once again, it has absolutely no stopping power with Putin continuing to hold all the chips.

Want to know more? then you will have to wait until tomorrow, when Putin will address a joint session of parliament on Crimea on Tuesday, the Kremlin's representative to the lower house said.

The Kremlin press service did not immediately confirm Putin would address the session of the State Duma lower house and the Federation Council upper chamber.

But Garry Minkh, the Kremlin's representative in the State Duma, told reporters the president would deliver a speech to the joint session following Sunday's referendum in which Ukraine's Crimea region voted to join Russia.

Putin Responds To US, European Sanctions: Signs Order Recognizing Crimea As Sovereign State

So much for de-escalating. From the Kremlin:

Vladimir Putin signed a decree "On the recognition of the Republic of Crimea." Full text of the Decree:

1. Given the will of the people of the Crimea on the referendum held on March 16, 2014, to recognize the Republic of Crimea, in which the city of Sevastopol has a special status, as a sovereign and independent state.

2. This Decree shall enter into force on the date of its signing.

Surely this will precede Putin's own executive order recognizing Crimea as the latest member of the Russian Federation.

One also wonders: how long until Russia freezes all assets of McDonalds restaurants operating in Russia.