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The London Metal Exchange (LME) is tracking tightness in the aluminum market, which has seen a key spread shoot to a sizeable premium and one party amass a large long or bullish position in the October contract.
“The LME is closely monitoring the tightness in the aluminum market and has the necessary controls in place to ensure continued market orderliness,” the LME said on Wednesday in response to a request for comment.
The premium of LME October aluminum over November hit $18 a metric ton on Wednesday from a premium of $5.85 about three weeks ago and a discount of $17.50 in July.
The premium is known as backwardation and usually is a sign of tight near-term supply.
The benchmark LME aluminum contract climbed after the LME said it was monitoring the market, rising 1.2% to a near four-month high of $2,680 a ton.
Prices could make further gains ahead of the October expiry in about two weeks if those with short or bearish positions scramble to cover, traders said.
If short positions are not settled on expiry by delivering physical material, buying back positions can lead to sharp price rises.
LME data shows that one party is holding a long position in October accounting for over 40% of market open interest.
Arrayed on the other side of the market are five short positions, each accounting for up to 9% of open interest.
Traders say the issue is complicated by a concentration of LME aluminum inventories in warehouses in Port Klang, Malaysia, which hold 74% of total stocks.
About two-thirds of the inventories at Port Klang are being prepared to be delivered out, creating a shortage of available stocks to the market.
Traders said warehousing company ISTIM has ruffled the feathers of some parties by raising fees to cancel delivery notices or “re-warrant” stocks up to a maximum of $27.50 per ton, compared to $5-$10 fees at other warehouses.
A warrant is a legal document showing ownership of inventories.
A source with knowledge said ISTIM last week re-warranted metal at zero cost.
ISTIM declined to comment.
The LME said its warehouse agreement prohibits warehouses imposing unreasonable charges for depositing metal.
“The LME would investigate any concerns of this nature which are brought to its attention”.
ISTIM controlled 94% of total LME inventories stored in Port Klang in August, the latest LME data showed.
“ISTIM’s move to charge for re-warranting of metal has meant those financiers who might look to deliver metal are finding the cost prohibitive,” said Alastair Munro at broker Marex.
(By Eric Onstad and Pratima Desai; Editing by Kirsten Donovan and Franklin Paul)
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