Aluminium markets roiled by big investor position

Aluminium prices slid in London trading Wednesday as an investor holding a huge position in the base metal faced settlement – the date when traders must close out their positions financially or take delivery of the metal.

Asking prices for aluminium to be delivered in three months fell to $2,667 per metric ton at the London Metal Exchange's official midday pricing, according to Dow Jones Newswires data. That's down from a close of $2,695.50 a ton on Tuesday.

U.K. aluminium markets have been roiled recently by the presence of an investor holding aluminium contracts amounting to about 90% of the light-weight metal held at LME-listed warehouses.

"The dominant long position that has been built up ... is a reflection of bullish sentiment in regards to aluminium," said Gayle Berry, aluminium research manager at London-based Metal Bulletin Research. "Potentially it could have quite a lot of influence on prices," she said.

According to Martin Hayes, a senior correspondent at BaseMetals.com, the holder is a U.K.-based hedge fund that has been accumulating this position since the end of last year.

This large position has put what's known in commodity circles as a squeeze on the market. As a contract settlement approaches, investors who hold long positions – or bets that the commodity's price will rise – must find buyers or take delivery of the underlying commodity. With such a large position, a dominant long investor can bid up the price.

This process becomes trickier when some investors are short the commodity, or are betting that the commodity's price will drop. Short sellers can pressure the long investors to lower prices. If they are unsuccessful, they face losses as they borrow to buy back contracts they previously sold.

With this Wednesday marking the "prompt" or settlement date for contracts on the LME, investors both short and long on aluminium were set for a showdown.

Michael Widmer, an analyst for Calyon in London, called the long position "quite a big bet," since volatility in the market raises the risk of the trade.

"I wouldn't advise anyone to put on a trade like that; you don't know when the market will turn," he said.

At the end of the day, sources following the LME said it appeared the investor had rolled over the position, a sign of expectations the metal's price will keep rising.

The recent high drama in trading circles underscores the investor activity that has shown up in aluminium, one of the few metals to have missed last year's commodity frenzy.

Indeed, the rise in aluminium prices in the fourth quarter surprised many analysts.

"Demand has been robust, but we believe speculative fund buying has been a key driver behind such strong pricing," said Morgan Stanley analyst Mark Liinamaa in a late December note to investors.

At the same time, some analysts – including those at Metal Bulletin Research – are expecting a surplus in aluminium this year. But aluminium giant Alcoa Inc. is forecasting continued strong demand for the metal this year, as Chinese consumption expands 14%.