Chicago-Based CME Group Looking to Challenge LME’s Dominance

Chicago-based CME Group is looking to challenge the dominance of the London Metal Exchange, as effects of the nickel crisis  in March continue. CME has successful copper and precious-metals contracts but has never managed to challenge the LME’s dominance in other industrial metals. However, it has seen strong growth this year, especially in  both aluminum and cobalt contracts. Aggregate open interest in CME’s Comex aluminum futures contract is up more than 400% since the start of 2022, while open interest in the Comex cobalt contract has risen more than 500%.

In addition, CME has been offering incentives to traders to boost its aluminum contract to capitalize on LME’s struggles. Also, in July it adjusted the timing of the daily settlement to increase arbitrage opportunities with the LME.

In cobalt, while activity in the LME’s longstanding physical contract has ground to a halt, CME’s cash-settled contract has taken off. Liquidity in the cobalt market is almost solely based in the CME after LME’s struggles.

Meanwhile, a surge in aluminum volumes began in July after CME changed the daily settlement period for the contract to line up with the close of trading on the LME. That opened up greater arbitrage opportunities during the most liquid period of trading on the incumbent bourse. It’s also seen a wave of new clients using the contract, with nearly 150 new accounts trading it between May and mid-September.

Still, CME’s aluminum contract remains small compared to the LME’s, but its rapid growth comes at a difficult time for the London exchange. After having incurred anger with its decision to cancel billions of dollars in nickel trades after a short squeeze in March, the exchange is also trying to make a decision on how to handle Russian aluminum.

Despite this year’s growth, CME’s aluminum contract isn’t about to replace the LME as the global benchmark any time soon. The total open interest in CME aluminum stands at about 30,000 tons, compared with 14 million tons for the LME.

Moreover, CME faces a similar dilemma on Russian aluminum. It says it will follow government guidelines when it comes to metals from Russian producers, a stance that could anger aluminum producers that have been lobbying for bans and sanctions.

Meanwhile, open interest in CME’s flagship copper contract has dropped sharply from a peak in 2017, matching a similar decline in the LME copper contract.

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