Aluminium was prey to the same technical selling that was a consistent feature on much of the LME metals complex last week and the flood of speculation about the powerful Red Kite hedge fund on Friday but the light metal was unfazed, holding relatively steady with the nearby structure still in the grips of strong backwardation.
Dominant Long
Aluminium's fortunes for some time now have been held by the dominant long position holder that has become part of the wallpaper in the LME's daily market concentration reports.
The long slipped down a band to "just" 80-90% of warrant/cash/tom positions for a while last week but as of Thursday (these reports are always back-dated two days), it had returned to the 90% plus band.
Its influence is clear to see across the nearby spreads. The benchmark cash-3-months period ended last week valued at $115 backwardation, unchanged week-on-week.
The battle with a couple of powerful funds on the other side has long been the talking-point around the LME "street" with the CTA systematic fund community tending to take the role of cannon-fodder in this big-boys' arm-wrestling competition.
It's a gentlemanly tradition in the LME market that account holders are rarely mentioned by name but a media storm broke Friday over the Red Kite hedge fund group. What started as a point of salacious gossip in a low-profile newswire took on mammoth proportions when it was picked up and given some extra swing by the Wall Street Journal. The story looks a bit long on speculation and short on facts in our opinion—it all derives from Red Kite seeking to change its redemption period rules—but it seems to have been the trigger for this relatively new addition to the hedge fund community to be collectively "outed" as the big aluminium long.
There will no doubt be plenty of further media speculation in the days to come but the identity of the big players tussling across the aluminium market does little to add to our knowledge of what is happening. Thanks to the LMEs daily reports, we've known for some time about the presence of a dominant long position holder. Thanks to the same, we also know there is significant upside call option open interest on this week's February declaration date and that there are three significant short position holders sitting on the third-Wednesday date in a couple of weeks' time.
In essence the battle continues and last week's net $75 fall in 3-month metal to $2,720 amounts to no more than a deferral of its eventual outcome.
Muted Response
What we also know by now is that the stocks response to what is historically a very large backwardation has been relatively muted.
Sure, we've seen metal sucked into the LME system by the cash premium, particularly in the US, but as we looked at in detail in Friday's issue, the cumulative increase in LME holdings of around 64,000t in December and January is a small one relative to what we've seen at times of past tightness. A smaller and shorter squeeze over the end-2005/start 2006 period, for example, saw LME stocks rise by almost 280,000t.
That sort of "knock-out" blow to the dominant long hasn't materialized this time round and its absence suggests the physical markets have been a bit tighter than was widely assumed.
Producer re-stocking in Europe and China's sharp hike in the export tax on primary metal may also be key parts of the answer but the lack of stocks surge suggests this slow-motion squeeze is going to rumble onwards for a while yet.
Metal production in the West should start accelerating again this year after anaemic growth in 2006 but the cumulative impact of restarts in North America and new projects such as that in Iceland is going to take some time to feed through into the market.
Aluminium is widely expected to register a market surplus this year but as Alcan said last week in its assessment of a 200,000t surplus, that's a fairly marginal figure by the standards of t
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