JPMorgan rattles traders with LME aluminium stockpile

JPMorgan Chase is holding more than half of the aluminium on the London Metal Exchange, a multibillion-dollar position that has rattled rival traders and raised questions in London’s tight-knit metal market about its influence on prices.

The bank’s $2bn-plus physical stockpile of aluminium, which could cover 40 years of Coca-Cola’s current UK drinks can output, has been blamed by many traders for pushing up the price of near-term contracts that are about to expire, even though the industry is in its seventh year of a major supply glut.

Big aluminium buyers, say the concentrated holding of at least 1.4m tonnes of aluminium stocks has distorted the supply outlook and made it more difficult to use the LME to protect against volatile prices.

“If you looked at the LME without knowing anything you would think the aluminium market is undersupplied, which it is not,” says Robin Bhar, an analyst at Société Générale.

“The build up of surplus metal since the financial crisis and low interest rates means it is possible for a powerful entity to buy a large portion of LME stocks.”

Eight traders, brokers and warehouse owners identified JPMorgan as the owner of the large position to the Financial Times. Its presence can be seen in exchange data that does not identify the owner.

The bank has said it trades metals only on behalf of clients, having sold the majority of its physical commodities business to Swiss trading house Mercuria 18 months ago. According to traders, JPMorgan has retained one of the largest metal dealing operations of any bank, as the commodity downturn has accelerated in the past 20 months.

While the size of JPMorgan’s position is allowed under exchange rules, the banks’ involvement in physical commodity trading has come under close scrutiny in recent years.

A US Senate subcommittee conducted a two-year investigation into the role played by banks in physical commodity markets during which time many, including JPMorgan, Goldman Sachs and Morgan Stanley, reduced their presence in the sector. The LME also introduced new rules to reduce lengthy queues at its network of warehouses.

Aluminium prices have dropped 46 per cent since touching a post-financial crisis peak at more than $2,700 per tonne in 2011 because of a supply glut.