LME Aluminum Squeezed Into Backwardation

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It won’t come as a surprise to aluminum consumers that the LME Aluminum contract has returned to backwardation, that is cash or prompt metal is at a premium to the 3 months price.

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The LME cash price has been flirting with backwardation for the last 2 months, sometimes at a discount, sometimes at the more usual premium. So news this week from Thomson Reuters that one firm had bulked up its positions to control more than 50% of the available aluminum on the London Metal Exchange last week served to ratchet up the tension in a market that has been gradually tightening all year.

According to the article, data released yesterday referring to Monday’s positions showed that a single participant was holding 50-80% of available aluminum stocks on the LME. As a result, the cost of rolling a short cash position for delivery tomorrow or the next day has soared above $7 per contract for the 4 trading days since a dominant warrant holder appeared on Nov. 26. Short holders were said to have been caught on the wrong side of the squeeze and raced to cover their positions, pushing up premiums.

The situation is not likely to ease, against a backdrop of year’s end when markets become quieter, positions are squared away and liquidity reduces the ability of a dominant holder to manipulate the market improves. Technically, LME rules limit the profit a party can make by hoarding so much supply on any day that traders with short positions are unable to cover them at the close.

As the article points out, any party holding a position worth over half of LME available stocks must supply metal to short-position holders at very modest price premiums. But this player is not doing this for fun. Physical metal has been getting tighter this year as industrial demand has picked up and smelter cutbacks have reduced supply.

As Reuters points out, US auto sales hit an annualized rate of about 17.1 million units in November, the best pace for that month since 2003 and not only are the number of cars up but the amount of aluminum per car has risen steadily. Indeed, automotive is the fastest growing consumer of aluminum and is set to continue that trend for the rest of the decade.

Not surprisingly, physical delivery premiums currently being negotiated for the 1st quarter of 2015 are expected to be some $10-20 per ton higher than current Q4 2014 levels. Asia is paying in the region of $420 per metric ton, but while billet suppliers were adjusting premiums monthly around the middle of this year, they have set fixed premiums for the first quarter of next year holding out the hope that some stability may be on the way. A convergence of the LME price to the delivered-market-price would be a welcome development for consumers next year, an objective the current shenanigans going on at the LME are not going to help one iota.

 

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