Trafigura faces off against aluminium bulls

Rising stock: Aluminium ingots in a depot in Wuxi, China. Trafigura has been accumulating a large stockpile of the metal over the past year. — Reuters

LONDON: The aluminium market is caught in a clash between some of the biggest traders and banks, with more than US$1bil of metal changing hands while lengthy queues form at London Metal Exchange (LME) warehouses.

The big bear in the market is Trafigura Group: the commodities trading giant has delivered massive volumes of aluminium onto the LME in recent weeks while touting its downbeat view.

On the other side stand banks and hedge funds including Squarepoint Capital LLP, Citigroup Inc and JPMorgan Chase & Co, which have responded by buying up Trafigura’s metal and ordering it back out of the warehouse system, according to people familiar with the matter.

The result has been a major change in who owns the world’s aluminium inventory, at a time when some are predicting shortages ahead.

It’s also heralded a return of the stockpile battles and warehouse queues that have been regular hallmarks of the LME aluminium market, causing controversy among buyers and headaches for the exchange itself.

The ballooning backlogs at facilities in Port Klang, Malaysia, mean that traders could now have to wait many months to take delivery of stock.

The events of the past few weeks have been the climax of a trade that began many months ago. Trafigura has been accumulating a stockpile of aluminium in Port Klang over the past year, much of it from India where the trading house has large contracts with suppliers including Vedanta Ltd.

Trafigura’s trade wasn’t a secret: the growing stocks of aluminium in Port Klang – a key global hub for aluminum storage – were visible in the LME’s monthly reports on metal stored outside its network of warehouses.

But nobody in the wider aluminium market knew exactly what Trafigura would do with the metal. Often, traders accumulating large stashes see opportunities to profit from increases in the physical premium that buyers pay over and above the LME price.

If demand outstrips supply, the location-specific premiums tend to rise as real-world consumers of aluminium draw down metal that’s held in stockpiles.

Instead, in the past two weeks, about 650,000 tonnes of aluminium sitting in Port Klang was suddenly transferred on to LME warrant.

Trafigura was the key player behind the deliveries, which led to an increase in live warrants of more than 500,000 tonnes on May 10 – the largest single-day delivery onto the LME in at least 27 years.

A few days after the deliveries began, Trafigura laid out its bearish outlook at a conference in London.

Analyst Henry Van predicted that aluminium prices would fall, saying it was was seeing “a very grim demand picture right now”, and noting recent smelter restarts.

But other traders are taking the opposite view. Of the metal delivered on to LME warrant in the past two weeks, about 400,000 tonnes – worth about US$1bil at current prices – was quickly requested for delivery out again. The buyers include hedge fund Squarepoint, and banks like Citi and JPMorgan, the people said.

In the short term, the buyers of the aluminium in Port Klang are likely to use it for so-called financing deals – holding physical aluminium and selling higher-priced futures. But in the longer term, the biggest payoff for the trade would come if the physical market tightens to a level that allows it to be shipped to real-world buyers for a profit.

The bullish view of aluminium has a growing following: investors on the LME, who were collectively short aluminum as recently as mid-March, have lifted their bets to the most bullish level in two years.

Inventories remain relatively low, while production in China is nearing a 45 million-tonne per year cap imposed by Beijing. Add in forecasts for demand growth of 3.1% this year – led by demand from China and India – and the market is set to tighten in the second half of this year, according to CRU Group.

“We’ve come to the end, largely, of destocking cycles in various sectors,” said Ross Strachan, principal analyst for aluminium at CRU. “As demand picks up, the industry will need to encourage the restart of new capacity.” — Bloomberg

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aluminium , metal , LME , Trafigura


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