NEW LME ALUMINIUM CONTRACT WELCOMED BY TRADE The London Metal Exchange's, LME, decision to introduce a dollar-denominated aluminium contract, with the Port of Singapore listed as a delivery point, is a positive move, physical traders and LME dealers said. Earlier this week the LME declared that a 99.70 pct minimum purity aluminium contract would commence trading on June 1, 1987, alongside its long-established sterling-based 99.50 pct contract. This is the LME's first dollar contract and non-European delivery point, and the Board and Committee are looking at Singapore as a delivery point for other contracts. Trade sources said the LME's new contract will conform with existing industry practice, where 99.70 standard re-melt material, priced in dollars, is most commonly traded. The location of a warehouse in Singapore is also a positive move by the LME, given its ideal location for Australian and Japanese traders, who would be able to place metal on to warrant speedily and relatively inexpensively, they said. Hedging during the LME ring sessions becomes much simpler with a dollar contract. At present pre-market trading is almost exclusively dollar-based, but currency conversions have to be done during the sterling rings, they added. LME ring dealers said the new contract would match more closely trade requirements and possibly alleviate some of the recent wide backwardations. Very little physical business is now done in 99.50 pct purity metal, nearly all of which is produced in Eastern Bloc countries, such as Romania. The Soviet Union also produces 99.50 pct, but has declined as an exporter recently, they said. Some dealers said the new 99.70 contract may suffer from liquidity problems initially, as business may continue to centre on the present good ordinary brand (gob) contract, where there are many holders of large short positions on the LME. But others said the new contract would soon attract trading interest, given that much 99.70 metal has already been attracted to the LME's warehouses by backwardations. The LME also has a much more viable liquidity base for a new contract, compared to the Comex market in New York, where high grade aluminium futures are not particularly active, they said. Thus, it seems likely that the sterling contract will eventually lose trading interest and volumes will decline. Like standard zinc, which was superseded by a high grade contract, gob aluminium will probably be replaced, although the process in this case may take longer, they added. Forming a new contract and establishing a Singapore warehouse are constructive moves by the LME but backwardations, which make physical trading difficult, would not totally disappear as a result, the trade sources said. These premiums for prompt metal have become a semi-permanent feature over the last year, due to increased business and volatility in traded options, and are presently around 50 stg. Increasingly large granting of option positions has been taking place. When some of these are declared and exercised at the end of the relevant month, physical tightness and squeezes around these dates are commonplace, they said. Listing Singapore as a delivery point allows Far Eastern operators to deliver aluminium into a LME warehouse instead of having to cover. But tightness and backwardations are seen continuing, even though the LME's new option contracts widen the gap between the declaration and prompt dates. These will be due on the first and third Wednesday of the month, whereas at present most fall on the 20th and 25th. Backwardations will remain while operators continue to grant options where potential tonnage to be delivered exceeds aluminium stock levels, an LME option trader said.