Taking aim at London, Chicago exchange debuts aluminum contract

(Updating with details throughout)

NEW YORK (Frankfurt: HX6.F - news) , May 6 (Reuters) - CME Group Inc (NasdaqGS: CME - news) 's new U.S. aluminum futures contract debuted on Tuesday with just 57 lots of metal changing hands as the Chicago-based exchange launched its audacious bid to challenge the London Metal Exchange's $51 billion market.

Some 41 lots, equivalent to 1,025 tonnes of metal and the vast majority of the daily total, changed hands in July, with seven contracts trading in August, four in September and five as far ahead as December.

While tiny compared with the CME's COMEX copper contract and the London exchange, it was healthier than many traders had expected given the stiff competition from the LME's entrenched benchmark.

"It opened stronger than everyone thought," said a veteran physical trader, who was still using the LME but watching the first day of CME trading.

"People are so sick of the LME, there's a will to make it work. At the end of the day it's about liquidity though."

Daily turnover in the rival aluminum contract at the LME, where aluminum is its biggest contract by turnover and open interest, averaged around 250,000 lots last month, equal to 6.3 million tonnes of metal.

Emboldened by a years-long crisis over the London exchange's warehousing policy, the Chicago-based exchange has rushed to move onto the LME's turf for a second time.

The LME's handling of its warehousing policy, which critics say has led to inflated physical prices and long wait times for delivery of metal, has angered end users such as MillerCoors LLC who use the metal for aluminum cans.

In late March, a court ruling derailed the LME's plans to overhaul its storage rules, deepening uncertainty over how to resolve the issue and handing the CME a last-minute fillip just weeks before the launch.

Newedge, one of the world's No. 1 commodities brokers, placed some orders for customers on Tuesday, Mike Turek, senior metals director in New York, told Reuters.

"Whether this will prove to be the magic panacea to the problems that plague the industry remains to be seen. Everyone's taking a wait-and-see attitude," he said.

The July price eased 0.46 percent to settle at $2,172.75 per tonne. The first trade took place at 7:36 a.m. EDT (1136 GMT).

Still, the contract is a long way from attracting liquidity from institutional investors like hedge funds or major industrial hedgers.

Some market participants say CME's low position limits will make the contract less useful for industrial endusers, while others say the exchange needs to increase its storage network.

So far, it has approved three warehouses, with another three outstanding.. The first spot contract is for July, so CME has almost two months until the first deliveries are due.

And luring cash away from established benchmarks is notoriously difficult. The LME's aluminum contract struggled for seven years to win over producers after its launch in 1978.

The New York Mercantile Exchange (NYMEX), now owned by CME, struggled for 10 years to gain traction with a North American aluminum contract before being delisted in 2009. It was unable to lure established users away from London.

"If you'd asked me a year ago, I'd have said it has zero chance. Now there's an 80 percent chance it'll fail," said the veteran. (Reporting by Josephine Mason; Editing by Chizu Nomiyama)