LONDON, March 8 (Reuters) - Activity on the CME's

aluminium contract has shifted up several gears in

recent months with volumes surging and the number of

participants expanding.

It's still small relative to the London Metal Exchange

(LME), which isn't going to lose its status as benchmark

price-setter any time soon. Nor will the Shanghai Futures

Exchange (ShFE) stop being the dominant futures price reference

for China's giant aluminium sector.

Rather, the significance of CME's fast-growing aluminium

contract is what it says about aluminium's shifting dynamics.

The global market is becoming less globalised and the U.S.

is starting to drift away from everyone else thanks to the

combination of import tariffs and penal duties on Russian metal

and Chinese products.

The emergence of a North American pricing point is a logical

evolution in this tectonic realignment of the market landscape.

PHYSICAL DRIFT

The CME's first aluminium contract was delisted in 2009

after the U.S. exchange failed to lure users away from the

dominant London market.

It was ironically the LME itself that opened the door again

for its U.S. rival a few years later.

Long load-out queues at LME warehouses in Detroit caused

U.S. physical premiums to surge. The LME price stayed low but

buyers were paying ever more for their metal and were unable to

hedge the pricing gap.

The CME launched a U.S. Midwest premium contract in 2013

followed a couple of years later by European and Japanese

premium contracts. Volume last year across the four contracts

totalled almost four million tonnes.

The LME's premium contracts, launched much later, notched up

volumes of just 202,000 tonnes last year.

The Midwest premium briefly converged with the rest of the

world before ballooning wider again when the Trump

Administration imposed 10% import duties in 2018.

The Biden Administration's policy of de-risking supply by

closing the door on Russian imports has cemented the structural

divergence with other regions.

U.S. physical buyers are currently paying around $387 per

metric ton over the futures price for metal. Those in Europe are

paying around $250 and Japanese buyers just $120.

That futures price has until now been set on the LME. But

maybe for not much longer.

GROWTH SPURT

The CME tried again in 2014 with a futures contract to match

its premium products but it lapsed into disuse late 2017 and

didn't trade at all until July 2019.

The trigger for the renewed interest was the CME's decision

to expand its delivery network from U.S. locations to

international ports, particularly those with physical arbitrage

opportunities with the LME warehousing network.

Registered stocks were zero prior to June 2019. Today they

stand at 45,905 tons, most of it in heavily-used LME locations

such as Malaysia's Port Klang and Gwangyang in South Korea.

With inventory has come trading volume. Activity in the

aluminium contract nearly tripled last year to 30.6 million

tons. That's dwarfed by the 1.4 billion tons transacted on the

LME, although the difference is accentuated by the LME's unique

trading system.

A more useful comparison is with the ShFE, which like the

CME, offers a vanilla cash-settled futures contract.

CME volumes in the first two months of this year came to 9.3

million tonnes, compared with 44.0 million in Shanghai. And the

U.S. product is still growing fast.

So too are the number of users, over 600 last year compared

with 357 in 2022, according to the exchange.

CME has also launched aluminium options, which just recorded

their best volume month in February.

CME ALL-IN ALUMINIUM

Although the CME's rising aluminium fortunes have until now

been linked via arbitrage with those of its competitor across

the Atlantic, there are signs that the contract's success is

generating domestic traction.

A key development came in April last year, when price

reporting agency Platts, part of S&P Global Commodity Insights,

began publishing a CME-basis all-in price.

Whereas physical buyers would previously hedge their basis

risk on the LME and their premium risk on the CME, the new

pricing tool allows both components to be executed on the CME.

Domestic players such as PerenniAL Aluminum are now offering

buyers a CME all-in price reference in this year's term supply

contracts, according to CEO Brian Hesse, quoted in a CME update

on the contract.

Industrial users are being joined by investors.

United States Commodity Fund (USCF) announced the launch of

the USCF Aluminum Strategy Fund in October. It will trade basis

the CME contract, hoping to attract investors looking for

exposure to aluminium as a critical energy transition metal.

Although included in all the major commodity indices,

aluminium has to date failed to attract much retail speculative

interest. CME, which offers investor friendly micro products in

both precious metals and copper, would seem a good fit for

smaller players unable to access the wholesale market in London.

CME is assembling the building blocks to become an aluminium

price-setter for the North American market.

REGIONAL SPLITS

This is not necessarily bad news for either London or

Shanghai. Three regional futures exchanges can be mutually

beneficial thanks to increased arbitrage possibilities.

Copper, which has traded on U.S. exchanges since the

nineteenth century, is a good example of profitable

co-existence.

But for aluminium, shifting from London dominance to

regional price formation is a completely new development.

It is, though, no more than a reflection of geopolitical

reality as what was a highly globalised supply chain drifts

apart into trading blocs.

The opinions expressed here are those of the author, a

columnist for Reuters

(Editing by David Evans)