Aluminium producers were not in favour of the LME contract during the first few years following its launch in 1978, and many lost heavily in the trader-led squeeze of 1988 that saw the cash-to-three-months spread rip out into a backwardation of about $1,200 per tonne.
At the contract’s launch, major producers did not want to give up the control over pricing they held under the old Alcoa/Alcan pricing model. But there was another reason that they were not prepared to commit to the new exchange.
“It wasn’t just that producers were resistant [to the LME contract], it’s that they didn’t understand it,” Malcolm McHale, president of the Federation of European Aluminium Consumers and special projects manager at Dubal, told Metal Bulletin.
“There was a lack of understanding at the senior management level and a lack of understanding at board level,” he added. “The people who understood the mechanism...