Risk of aluminum squeeze grows as key price spread tightens

A key aluminum spread that’s been the focus of recent intervention by the London Metal Exchange surged into backwardation, signaling the LME market may still be at risk of a squeeze as the main June contract expires next week.

The contract traded as much as $10.15 a ton above July on Tuesday, after many weeks during which the spread had been capped at zero, or “flat.”

The move is the latest twist in the drama surrounding a giant aluminum bet by Mercuria Energy Group Ltd. Bloomberg reported Friday that the trading house, which built up a huge position in the June contract, had been compelled by the LME to lend it to other traders at “flat” in order to reduce risks to the market.

The spread’s shift into backwardation may be a sign that Mercuria’s position is no longer bound by the requirement to lend at that level. LME data showing the situation last Friday reveals one trader had a position equivalent to 20% to 29% of the open interest in the June contract, or 297,000 to 446,000 tons. That’s down sharply from early last week, when the position exceeded 862,000 tons.

Recent order-book data from the exchange has consistently showed a large volume offered at flat. But from around 4:20 p.m. on Monday afternoon, the spread was no longer offered at the capped price and the market leaped into backwardation.

Other parts of the LME aluminum market also tightened on Tuesday. The so-called tom-next spread, paid by traders to roll their expiring short positions for one day, jumped to as much as $12.34 a ton, the highest since December.

A spokesperson for the LME declined to comment on the specifics of the market, reiterating an earlier statement that the exchange has “arrangements in place to guard against any undue influence of large or dominant positions.” Mercuria didn’t immediately respond to a request for comment.

Bloomberg has reported that the LME is considering imposing limits that would prevent traders taking very large positions — larger than the total inventory — in the nearby monthly contract. LME aluminum stocks stand at about 360,000 tons, with a further 320,000 tons of deliverable metal held “off warrant,” according to the exchange.

Aluminum traded on the LME gained 0.5% to settle at $2,492.50 a metric ton at 5:50 p.m. local time. Other main metals were mixed, with copper down 0.4% and zinc up 0.3%.

(By Jack Farchy)