Commodities & Futures: Future of new alloy contract in the balance

THERE was a buzz of unfamiliar accents in the London Metal Exchange last Tuesday. The new aluminium alloy futures contract was being launched, and the metal brokers had invited some of the suppliers and end-users to see how the guys with the telephones and funny hand movements did their business. The overwhelming accent was West Midlands, which was probably comforting to the people in the City, who did not know anything was still made there.

From the market's point of view the new contract is interesting. It is the first time a contract in a processed, as opposed to basic, metal has been traded. The raw material comes from scrap: from factory offcuts, from bits of cars, washing machines or whatever. It is processed by aluminium foundries, and bought by die-casting companies. Much of the cast product will end up being used once again in cars.

The price of alloy has weakened in the past three years. LM6, a good quality alloy, peaked at about pounds 1,200 a tonne in 1989 and has now dropped to about pounds 900. The collapse of sterling has pushed the price up by about pounds 50, while the recession has had a double-edged effect: while it has reduced demand, it has also reduced supply, because factories are producing less scrap. This is not just a recessionary phenomenon; factories have in general become much less profligate with their metal. The market thus has a complex supply as well as demand element.

No-one is prepared to bet on how well the contract will work. While the brokers and traders will probably do well out of it, there is great uncertainty among the men from the Black Country. Foundries that are short of work (of which there are plenty) will not be complaining in the short run, for it gives them a new market for their product. When the warehouses are opened up on 6 January, the end of the first three-month contract, there will probably be plenty of ingots in them.

Whether there will be genuine industrial demand for the ingots is another matter, however. They will be of three grades, corresponding to basic Japanese, American and European standards. But, one die-caster says, 'no-one in this country will use them'. They are low quality, and will need to be melted down and reformulated before they can be sold to an end-user. 'Why should anyone buy a metal out of a warehouse that might have been there for years when he can get what he wants made down the road?' he asks.

He is also sceptical that the contract will reduce volatility in the market, as advertised. While agreeing that alloy is a relatively volatile metal, he says the current system, under which motor manufacturers - the main end-users of alloy - agree to adjust the price every month is quite satisfactory.

He suspects that the new contract will in general push the price up, while fuelling the volatility. 'Why do we need a market where prices can be manipulated by speculators who might send them up or down by pounds 50 in a day?' he asks. 'If somebody locks into a price that it is pounds 50 higher than it would have been, he may have stability but at what price?' He adds: 'Anything that puts up the price of alloy puts up the price of the car.'

Ralph Kestenbaum, chairman of the LME's aluminium alloy committee, responds that all this is to miss the point of the exchange. He points out that 'the LME does not set itself up as a supplier. It is basically to be used for quotation purposes.' He acknowledges that there must be genuine demand for the ingots, however, and believes there will be. 'About 80 per cent of the Japanese who import the standard JIS Japanese alloy remelt it and cook it up with extra pepper and salt.'

He also rejects the charge that there will be extra volatility. 'There may seem to be, but that is because there is more transparency.' Industrial prices go up and down because discounts are cut and increased, even if the published price is not changed.

On 6 January, we will get a clue as to whether the market will work. Despite his objections to the contract, the die-caster thinks it probably will, because of the skills of the LME. If it does, the alloy market will have a new reference point: the pages of Metal Bulletin will be a little less heavily thumbed. We shall have to wait a littler longer to find out if we will also have to pay more for our cars as a result.

(Photographs omitted)

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
Voices
A propaganda video shows Isis forces near Tikrit
voicesAdam Walker: The Koran has violent passages, but it also has others that explicitly tells us how to interpret them
Arts and Entertainment
World Book Day
News
people
Sport
Ashley Young celebrates the winner for Manchester United against Newcastle
footballNewcastle v United player ratings
Life and Style
love + sex
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Christine McCleave: FP&A Analyst

£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Day In a Page

War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable
Living with Alzheimer's: What is it really like to be diagnosed with early-onset dementia?

What is it like to live with Alzheimer's?

Depicting early-onset Alzheimer's, the film 'Still Alice' had a profound effect on Joy Watson, who lives with the illness. She tells Kate Hilpern how she's coped with the diagnosis
The Internet of Things: Meet the British salesman who gave real-world items a virtual life

Setting in motion the Internet of Things

British salesman Kevin Ashton gave real-world items a virtual life
Election 2015: Latest polling reveals Tories and Labour on course to win the same number of seats - with the SNP holding the balance of power

Election 2015: A dead heat between Mr Bean and Dick Dastardly!

Lord Ashcroft reveals latest polling – and which character voters associate with each leader
Audiences queue up for 'true stories told live' as cult competition The Moth goes global

Cult competition The Moth goes global

The non-profit 'slam storytelling' competition was founded in 1997 by the novelist George Dawes Green and has seen Malcolm Gladwell, Salman Rushdie and Molly Ringwald all take their turn at the mic
Pakistani women come out fighting: A hard-hitting play focuses on female Muslim boxers

Pakistani women come out fighting

Hard-hitting new play 'No Guts, No Heart, No Glory' focuses on female Muslim boxers
Leonora Carrington transcended her stolid background to become an avant garde star

Surreal deal: Leonora Carrington

The artist transcended her stolid background to become an avant garde star
LGBT History Month: Pupils discuss topics from Sappho to same-sex marriage

Education: LGBT History Month

Pupils have been discussing topics from Sappho to same-sex marriage
11 best gel eyeliners

Go bold this season: 11 best gel eyeliners

Use an ink pot eyeliner to go bold on the eyes with this season's feline flicked winged liner
Cricket World Cup 2015: Tournament runs riot to make the event more hit than miss...

Cricket World Cup runs riot to make the event more hit than miss...

The tournament has reached its halfway mark and scores of 300 and amazing catches abound. One thing never changes, though – everyone loves beating England
Katarina Johnson-Thompson: Heptathlete ready to jump at first major title

Katarina Johnson-Thompson: Ready to jump at first major title

After her 2014 was ruined by injury, 21-year-old Briton is leading pentathlete going into this week’s European Indoors. Now she intends to turn form into gold
Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot