Aluminium market braced for squeeze

The London Metal Exchange insisted on Wednesday that the aluminium market was orderly, in spite of the prospect of one party potentially taking delivery of most of the aluminium inventories from warehouses registered with the LME.
 
Metal traders should find out on Thursday whether the party that holds a long position that equates to about 650,000 tonnes - or 91 per cent of the 714,025 tonnes of aluminium in LME warehouses - will take delivery. If it does, it could push aluminium prices higher. If it does not, the market could experience tightness for the next few months as the market participant unwinds its position.

"We do not see anything but an orderly market in aluminium," said the LME. It also added that trading in the aluminium market had not contravened LME rules.

One veteran trader questioned the robustness of the rules.

"The LME says there is nothing wrong with the market according to their measurements, but the question is, are their measurements adequate for enforcing an orderly market?"

Critics of LME rules have complained that the exchange has no control over the flow of metal into and out of warehouses, which in turn can influence sentiment towards a metal and its underlying price.

The build-up by one player of such a dominant position has forced the cash price of aluminium up by a significant premium to the benchmark three-month forward price. Aluminium cash prices were quoted at $2,779 a tonne on the LME on Wednesday, compared with a three-month price of $2,670 a tonne - giving a premium of $109, up from $30 at the start of the year.

The premium hit $120 on Monday, the widest spread between the two pricessince 1990. When the spread moved toward $100 a tonne in 2003, the LME launched an investigation.

The higher cash price forces industrial consumers of aluminium to pay up, while allowing holders of the metal to lend at the cash price, plus a small premium if they hold more than 50 per cent of the open interest, the number of contracts outstanding in the metal on the deliverable day.

The LME does not enforce any lending conditions on holders of less than 50 per cent of the open interest.

Traders said the market participant with the long position might also own a significant amount of the 8,400 February call options on LME aluminium at a strike price of $3,100 a tonne.