London, 14 January 2011

The Singapore Exchange will launch small-size, cash settled metal futures with the London Metal Exchange on Tuesday hoping to carve out a niche in a market already crowded with competing andsometimes underused equivalents. The contracts, one fifth the size of the standard LME product, may still struggle to find an audience some market watchers said, caught between the complicated world of full-bore commodity futures, and more straightforward equity markets.

"There may be some retail interest, but this is not launch specifically as a retail product. Our audience is institutional investors and players already in the commodities space," Magdalyn Liew, AVP, Communications of SGX said.

"Anyone who trades futures here could expand to commodities through these products, and there may be customers of those traders who want to get into metals."

Considering a single lot of the copper contract would cost more than $50,000 or S$64,000, the retail market may be limited.

Copper would have to compete with S$11,360 for one lot of Keppel Corp , S$14,880 for one lot of shares in banking group DBS and S$3,000 for one lot of Singtel. "The audience for these things is quite limited I think. Trading futures isn't easy -- not something for a novice. I think the exchange would have to invest in a lot of training and public information in order to get them to fly," said a trading source at an equities and commodities broker in Singapore.

"The main interest will be in copper. There is some understanding the tightness in that market and the Chinese demand picture, but no one will touch the aluminium or zinc," he added.

But the joint venture may end up in head-to-head competition with the LME's own thinly-traded minis products, which for existing market participants offer the advantage margin-offsets.

The margin offset between copper and zinc LME contracts and the LME minis contracts is 95 percent between the LME high grade aluminium contract and the minis contract it is 90 percent. The products will carry the Reuters Instrument codes for copper, for aluminium and for zinc. The Singapore Exchange is also looking at lead, tin and nickel contracts.

"They have pitched these contracts not only to industry but also to retail investors. There are a lot of players in this market," said Avtar Sandu, manager, commodities at Philip Futures in Singapore.

"The target audience is speculators - short term and day traders, rather than buy and hold, but it's difficult to say how big this market is. They are not only looking at Singapore but also Japan, Korea and China. For our part we plan to conduct a lot of seminars and education to explain how LME futures work."

The space is already crowded. The LME's product was launched in December 2006 and after a flurry of interest in the early days, the contracts went cold, until relatively recently when changes in trading rules saw a modest pick up in activity.

The CME Group also offers five tonne mini contracts while trade on the Shanghai Futures Exchange is conducted in five-tonne lots.

Investors also have the option to invest in physicallybacked copper exchange traded products such as those offered by ETF Securities . The contracts may find some take up amongst Asia's smaller physical traders.

"These are not instruments we are likely to use," said the Asia head of a very large physical trading operation. But with a full size LME lot of copper costing around $250,000, there may be interest from smaller physical traders looking to hedge exposure using the smaller contracts.

"You sometimes get a customer who wants say 40 tonnes of copper. To fill the order you'd buy two lots or 50 tonnes. In the old days, when prices were $3,000, that was $30,000 worth of risk, which you could carry fairly easily. Today that is $100,000 worth of risk and if you can't let that sit on the book and hope the market doesn't move against you."

Outside Asia, the interest was limited, with brokers taking the normal wait-and -see approach. "I am aware of these new mini contracts, not a great deal of notice is being taken here yet," one London-based trader said, adding that the main market would only take notice if the new products started to influence the main contracts.

"It seems like an experiment into whether or not a simpler date system may work and eventually volume weighted closing prices."

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