Aluminium squeeze in focus, weighs on other metals

LONDON, Jan 17 - Aluminium fell by over one percent on the London Metal Exchange on Wednesday, pulling other metals lower with most eyes on aluminium stocks and the market squeeze.
 
"Everything looks a bit on the weak side...drifting without much sense of direction as the key underpinning the metals was aluminium," economist John Kemp at Sempra Metals said. Aluminium for delivery in three months was at $2,652/57 a tonne by 1112 GMT from Tuesday's $2,681 close.

Copper fell 2.0 percent to $5,600/15 versus $5,715.

The market has been supported by a large position in aluminium holding some 90 percent of available material on Friday, leaving the market short ahead of January's third Wednesday, when the contracts expire.

"At the moment we are still waiting to see how this plays out...the interesting thing is to see where the nearby spreads are trading," Kemp said.

The squeeze had caused the nearby spreads or backwardation -- the extra money paid for cash metal over the three-months price -- to hit $120 on Monday, up from $30 at the start of 2006 and the highest since 1990. [ID:nL16610192]

On Wednesday, the backwardation eased to around $85/95.

Ahead of the third Wednesday, investors must decide whether to buy or sell an equal and opposite position, to take or make delivery or roll the monthly positions forward.

By tracking stocks in LME warehouses it is possible to see if the large position holder decided to deliver into warehouses.

The stocks rose on Tuesday to 701,400 tonnes and on Wednesday they rose by 12,625 tonnes to 714,025.

Analysts had been expecting around 50,000 tonnes or more, so the very small inflow of stocks into LME warehouses suggested that some of these positions must have been rolled forward.

"Whoever is conducting the squeeze obviously did not want a large amount of stock to be drawn into warehouse," Kemp said.

By studying the amount of open interest or outstanding contracts for the coming months it should be clear shortly how the position had been rolled forward.

"Aluminium's short-term direction will become clear following the settlement of the third Wednesday pricing and the fate of the long position," Deutsche Bank analyst Peter Richardson said in a report.

Workers at Guinea's CBG bauxite company halted output of its main mineral export in support of a general strike.

The country is the world's biggest shipper of the ore from which aluminium is extracted.[ID:nL17764951]

STOCKS WEIGH ON COPPER

Rising copper stocks dampened sentiment, up by 2,225 tonnes to 199,125, more than double the amount since the start of 2006.

Zinc was at $3,640/3,657 versus $3,720 with stocks coming in higher at 100,325 tonnes, up by 5,725.

The metal has fallen by around 13 percent since the start of the year, pressured by index re-weighting and rising LME stocks.

"But we expect prices to move higher as the fundamentals remain very tight and the threat that China would export more metal has receded," Robin Bhar at UBS said in a note.

Nickel bucked the trend, up $450 to $34,050/34,250.

The backwardation was at around $2,000 per tonne, up some three times since the beginning of the year, reflecting low stock levels with only 4,428 tonnes available to the market.

Workers at Xstrata Plc's operations in Sudbury voted in favor of a strike mandate. [ID:nN16253044]

Lead lost $35 to $1,550/1,565 and tin was at $10,600/10,700 from $10,625 on Tuesday.