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Closer look at LME aluminium prices reveals anomalies

[LONDON] A first glance at aluminium prices on the London Metal Exchange yields few surprises, yet a closer look often reveals anomalies caused by one market participant holding large amounts of metal.

Sources at commodity trading houses, warehouses, producers, brokers and banks say recently one such company is US bank JPMorgan. Others have done so in past.

JPMorgan declined to comment. "There are no position limits (on aluminium contracts) as such on the LME, if you are financing physical material there are no limits," a metals analyst said. "The LME is a physical market, no rules have been broken." While allowed under LME rules, holding a large, sometimes dominant position can to an extent have an influence on prices in the short term for contracts that will soon reach maturity.

The LME declined to name any dominant position holders but said it "would seek additional information from market participants regarding activity that raises concern". "If a breach of the LME's rules is deemed to have occurred, we would take appropriate action." The recent situation has left short position holders or sellers of metal for future dates, which could be bets on lower prices or hedges for physical holdings, having to pay more to buy back and roll positions forward. "JPMorgan have been doing this on-and-off for a long time. The backwardation (or premium) doesn't accurately reflect oversupply," a source at a commodity trading firm said.

Benchmark aluminium on the London Metal Exchange last November hit a 6-1/2 year low of US$1,432.50 a tonne. It has since recovered to around US$1,570, but is expected to again come under pressure from Chinese exports, surpluses and high inventories.

Higher prices of metal for nearby delivery compared to contracts further out on the maturity curve is known as backwardation or premium and suggest tight supplies, while a discount or contango appears when surpluses are the norm.

The large holdings have typically meant a premium for nearby contracts when an oversupplied market suggests a discount should be the natural state.

A recent example is a US$5 discount for the February versus the March contract becoming a premium of US$8 on Feb 15, two days before expiry. One firm held 20-29 per cent of open interest of the February contract on Feb 10, 403,000-584,000 tonnes valued at US$596-$864 million. "The positions are large, not many people can do these amounts. It's worthwhile for JP because they can borrow very cheaply, they have the credit rating," an aluminium trader at a commodities broker said.

JPMorgan has an investment grade rating from credit rating agencies Standard & Poors, Moody's and Fitch. It is one of few banks that kept its investment rating after the 2008 financial crisis.


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