Hedges test mettle of aluminium

Aluminium is emerging as the new metals plaything of the hedge funds, with strong bets being placed on both sides of the price outlook.

Analysts in London suspect aluminium is becoming the new speculation game in metals, the trading fuelled by cash pulled out of copper.

And the nature of the frenzy should become clearer tonight. The third Wednesday of the month is the critical time for aluminium traders, being the day when options and futures contracts are settled.

The Financial Times is reporting that one investor, believed to be a hedge fund, is holding a $US1.7 billion ($2.2 billion) long position, a bet that will pay off if aluminium prices rise.

That position amounts to 645,000 tonnes of aluminium, just 40,000 tonnes short of total aluminium stocks at the London Metal Exchange warehouses.

But the London newspaper says there are also a number of funds holding short positions and they may have a secret weapon to force prices down. It is rumoured these traders have substantial amounts of aluminium to dump into the market.

There is an even larger short position, of more than 920,000 tonnes, due for settlement in March, reports the newspaper.

"This is thought to be held by the same investor controlling the long position," it added.

But, as Deutsche Bank points out in its latest report on local stock Alumina, the metal's outlook is far from clear. And there are considerable regional variations.

It sees US demand for both alumina and aluminium falling because of downturns in the automotive and housing markets.

By contrast, Asian demand remains strong with Chinese use in 2006 being 17 per cent higher than the previous year.

Deutsche predicts that the aluminium market, in deficit to the tune of 320,000 tonnes last year, will move into a 260,000 tonnes surplus in 2007 and remain on that side of the ledger until 2010.

Clouding the picture still further is the growing demand for the metal for use in cars.

London-based vehicle industry analysts Knibb, Gormezano & Partners have released a study showing that aluminium use in European-made cars has increased from an average 50kg per vehicle in 1990 to 132kg in 2005, and is predicted to rise to 157kg by 2010.

Aluminium is increasingly being substituted for steel to make cars lighter and therefore use less fuel, reducing carbon dioxide emissions.

Meanwhile, spot copper was the only metal to retreat in Monday's trading on the LME. Spot prices fell 2.2 per cent to $US5613/tonne.

The bright spot again was nickel, up 1.9 per cent to $US35,175/tonne spot.

Commonwealth Bank commodity strategist Tobin Gorey said copper continued to look weak and seemed to be coming back to earth at a rapid rate.

"Certainly it's earlier than expected – we'd pencilled some substantial falls starting late this year," he said yesterday.

Inventories were creeping up but the still high price of copper would encourage more new production. However, Chinese buyers could be drawn into the market by these lower prices, Mr Gorey said.