Aluminium market edgy, copper under pressure

LONDON, Jan 15 - Aluminium trade was edgy on Monday as a squeeze tightened the market ahead of the third Wednesday of the month, by when London Metal Exchange investors must have decided how they want to close prompt positions.

"It is third Wednesday prompt but on the other hand it is Martin Luther King Day, with a lot of people being away...it could be very volatile," analyst Robin Bhar at UBS said, referring to the U.S. public holiday.

One option for investors is to make or take delivery of metal, the other is to buy or sell an equal and opposite position at least two days before the third Wednesday, or January 17, prompt date.

Three months aluminium was at $2,730 a tonne in the open outcry trading session, up by $25 from Friday's close.

One player had built a dominant position and controlled some 70 percent of LME stocks, which amounted to 691,350 tonnes.

There was also a large short position of around 920,000 for the March 21 prompt date which could be related, analysts said.       

The holder of the long position was probably a hedge fund, merchant or investor, economist John Kemp at Sempra Metals said.

"But the more interesting question is who holds the other side of these positions and how they intend to settle them."

The purpose of the large holding could be to create tightness to underpin prices, analysts said. [ID:nL10156555]

Bhar at UBS said: "If this long large position will be rolled forward to the coming month, that might suggest that it might be some sort of operation to support prices."

The squeeze had caused the backwardation -- the premium paid for cash metal over the three-months contract -- to hit $120, up from $30 at the start of the year and the highest since 1990.

A market in backwardation means investors can make money by lending metal to the market by selling cash and simultaneously buying three-months contracts, pocketing the difference.

COPPER UNDER PRESSURE

The timing of the squeeze has roused suspicions that the money banked by selling copper has been ploughed into aluminium.

"There may be that speculators are leaving copper to trade in aluminium and some of the other metals," Bhar said.

Copper has fallen over 10 percent since the start of the year and the three months price was down 1.0 percent at $5,690, from $5,750 at the close on Friday.

Copper stocks in LME warehouses came in at 199,450 tonnes, more than twice their level at the start of 2006 and nearing 200,000 -- where the market was no longer deemed tight.

"The market could get slightly rattled once we cross over that (mark)," analyst Edward Meir at Man Financial said.

Copper and aluminium are expected to extend their losses this year, but supply shortages mean nickel and zinc could revisit recent highs, a Reuters survey showed.[ID:nL15302191]

Zinc was up $74.5 to $3,844.5 and nickel was up 2.8 percent at $33,300/33,400 versus $32,400 on Friday.

"Prices should push slightly higher, but resistance at $35,000 remains quite stiff," Meir said in the daily report.

The backwardation was at around $2,200 per tonne, more than three times its level at the beginning of the year.

"It is all signs of a strong physical market with stainless steel production still high, and stocks are low enough to cause more volatility on the upside," Bhar said.

Stocks in LME-registered warehouses dropped by 240 tonnes to 5,676, with only 4,200 available to the market.

Lead was at $1,630/1,635 against the last quote on Friday at $1,605/1,610 and tin was at $10,550/10,575 versus $10,500.