Are we in for a repeat of longer LME aluminum load-out queues, rising physical delivery premiums?

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Aluminum production
Alexander Chudaev/Adobe Stock

A recent Reuters article doesn’t say so in as many words but certainly suggests conditions are fertile for warehouse operators to incentivize metal deliveries again and, in the process, queues could form at exit.

The article focused on what it termed a “flash squeeze” in LME rollover premiums from one day to the next, termed tom-next, where short sellers who had to roll over their short positions by buying today and selling tomorrow – usually a small contango.

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Those sellers found themselves squeezed by a major position holder in the market and having to pay up to $20/ton to access metal, the highest since the great warehouse debacle in 2012. The one-day squeeze collectively cost short sellers over a quarter of a million dollars as 140 lots traded at $20/ton and a further 497 lots traded at $19/ton backwardation.

The squeeze on Thursday night was chiefly down to one dominant long position holder accounting for 30-40% of available LME stocks. Additional cash positioning lifted that ratio to 40-50% — equivalent to up to 730,000 tonnes, Reuters reports.

Despite CRU estimating the world outside of China is likely to see a 3.2 million ton surplus this year, the excess production is being snapped up by the stock and finance trade.

Inventory on the LME has surged from 967,325 tons in mid-March to 1,624,775 tons now, Reuters reports.

But that’s only part of the story.

Shadow stock and finance trade could have accumulated twice as much during this period. Warehouse operators are competing for metal again and while physical delivery premiums have not responded so far, Japan’s third-quarter deliveries have been agreed at $79/ton (the lowest level since 2016). This suggests the risk is to the upside as the trade market competes with investors for metal. Perverse as that sounds in a world awash with metal, but pretty much the same situation happened in the years after the financial crash when the stock and finance trade was last at its height.

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Since then, the LME has brought in game-changing rules to cap load-out rents and if not force then at least coerce warehouse operators to prevent the buildup of queues again.

We shall see in the months ahead if those rules hold the line and prevent a steep rise in physical delivery premiums, as it looks like they are going to be put to the test if the current strong forward price premiums continue to facilitate the game.

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