Trading in outright aluminium prices remained a function of activity within the nearby spreads last week but, say it softly, it may no longer be in the grip of the dominant long-position holder who has squeezed the market ever since the back end of 2006.
Dominant Long Gone?
The evidence is still a little circumstantial but it points at the very least to a marked loosening of the slow-motion squeeze that has held the light metal since last November.
The most recent LME compliance reports—effective the close of business last Thursday since they are always back-dated two days—show two dominant long position holders on cash and tom/next. One is in the 30-40% band and one is in the 40-50% band. This is a marked change from the previous days, weeks and months, when one party was consistently in the 90% plus band, albeit occasionally teasing us with a shift down one band before the vice-like grip was re-applied.
It's impossible to infer from these LME reports whether the two current long-position holders include a reduced position by the original player. For reasons of confidentiality, the LME doesn't disclose just who is in which particular band.
However, the passage of the March prime date last week brought with it a marked loosening of the entire nearby market structure. Monday itself saw the spreads bid out, aggressively at times, with the result that the entire cash-to-3-months period widened to $30.50 backwardation at the close from Friday's $22 backwardation. Over the next 24-hour period the backwardation collapsed to "just" $6 back by Tuesday's close. Thereafter, it moved to contango, albeit with pockets of tightness still evident as shorts looked to cover the gaps in their trading books. By Friday's close the period was valued at $9.50 contango with only the June-to-3-months period still in backwardation.
For some time there has been a lot of speculation on the London "street" that the dominant long had a built-in exit strategy via short positions accumulated on the March prime date. The evidence is not hard and fast that it has exited completely but, even assuming it is one of the reduced dominant longs in the LME's latest compliance report, it would mark a substantial letting-go of the nearby dates.
The shifts in the nearby market structure were the dominant driver of outright 3-month prices last week, notwithstanding the continued macro-economic ripples washing over the LME complex—a Chinese rate cut, more US sub-prime jitters and Thursday's dovish statement from the US Federal Reserve.
LME 3-month metal tried to build on its previous week's close at $2,812 but after an early sight of the $2,830 level, easing spreads undermined market sentiment and it fell back to $2,750 at Wednesday's close. The feel-good factor resulting from the Fed's statement—equity markets up, dollar down, gold and oil up—was worth only the briefest of rallies for aluminum. After a touching glance of the $2,800 level late Thursday it slipped again on Friday to close the week out at $2,763—a week-to-week loss of $51.
Producer selling is very much capping this market above the $2,800 level right now and the dissipation of the nearby tightness has taken the pressure off technical and other fund shorts. The likes of the CTA systematic community continue to lighten their short exposure—now around 25% of historic capacity, according to our sources—but it has become a steady attrition process, as much reflecting a lack of momentum in the market as any spread-induced bear stampede.
Rising Stocks, Rising Production
The recent talk among the London bulls was of aluminium making it to $3,000, basis 3-month metal. That chatter seems to have gone quiet in the last few days with locals digesting the movements in the nearby spreads and the reduced influence of the dominant long in making such a move happen.
Rising LME inventory levels—in stark contrast to the likes of copper&mdas
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