What the LME’s new lending rule means for U.S. aluminum buyers (Part 1)

If you hedge aluminum using the LME or follow it as a price reference for physical transactions, there is a new development worth watching.

The London Metal Exchange has introduced a temporary rule aimed at preventing tightness in front-month contracts. These are situations where one party controls too much of the nearby position, reducing liquidity and driving spreads out of balance. Under the new Front Month Lending Rules, traders who hold more nearby futures than there is physical stock will now be required to sell the front month and buy the next to make carry liquidity available at no premium.