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Alumina derivatives see increased interest with South32 entry

Singapore — Interest in alumina derivatives has increased recently, with new counterparties adding much needed liquidity, market sources said this week.

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Key producer S32 has made a couple of trial trades recently.

Trading in alumina derivatives trading had been slow for some time, and industry sources said more participation from producers was needed for volumes to materially increase.

"It's a massive opportunity for the industry to mature further," South32 chief marketing officer Peter Finnimore told S&P Global Platts. "The alumina market hasn't had the benefit of derivatives; it's an opportunity to see a derivatives market emerge." This could then would pave the way for a forward curve market to develop, Finnimore said.

There are often too many participants on the same side of the market, and consequently a lack of counterparties to trade with, sources have said.

South32 traded alumina derivatives for the first time in August, and there is talk in the market that at least one other producer may be planning to enter the fray.

On August 7, a trade comprising 15 lots totaling 1,500 mt was done at $300/mt FOB Australia for the fourth quarter of 2019. On September 17, another 30 lots totaling 3,000 mt traded at $300/mt FOB Australia for the fourth quarter of 2019.

Both deals were on the CME Group's contract priced off Platts FOB Australia daily assessment.

The CME launched two alumina cash-settled contracts in September 2016, one each priced off Platts and Metal Bulletin's FOB Australia assessments. In March 2019, the London Metal Exchange launched an alumina futures contract with CRU and Fastmarkets MB.

To date, only the Platts alumina contract has traded, with open interest totaling 295 lots on September 19.

Brokers have said that as the physical price curve has started to flatten after an extended period of extreme volatility, it may increase the chances of a healthier mix of bids and offers in the derivatives market.

Derivative trading volumes have been thin and patchy since the alumina market experienced severe supply shocks in 2018, driven by nearly one-and-a-half years of halved output at the Alunorte refinery in Brazil due to environmental disputes with local authorities.

Alunorte is the world's largest alumina refinery, typically turning out about 5.8 million mt/year. Between March 2018 and June-July 2019, its run cut removed about 242,000 mt/month of alumina from the market, creating shortfalls around the globe, with consumers in Canada, Iceland and Norway hit particularly hard.

-- Joanna Lim, joanna.lim@spglobal.com

-- Edited by Jonathan Fox, newsdesk@spglobal.com