Closer look at LME aluminium prices reveals anomalies

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 U.S. bank JPMorgan. Others have done so in past.

"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 $1,432.50 a tonne. It has since recovered to around $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.