Most of the media stories out last week containing the word "aluminium" were multiple variations on a theme, that theme being Alcoa's predatory move on its Canadian counterpart Alcan.
Amid the many, many analyses and comments, the stock market hysteria spread to encompass just about every major mining and metals stock. Chief executives the world over will probably be more cautious about where they have dinner after one-such evening encounter between the outgoing bosses of BHP Billiton and Rio Tinto in Dublin early in the week put the latter in the frame for a take-over by the former….well, according to the media anyway.
All the time, aluminium seems to be positioning itself for the "big push" up through $2,900 (basis 3-month metal).
It got there on Wednesday morning thanks to some heavy-weight buying by a heavy-weight fund but the move stalled just at the April high and well-flagged resistance level of $2,930.
The light metal subsequently went into retreat, tumbling all the way back to $2,810 on Friday morning as short-term players and technical sellers rode the coat-tails of the fund profit-taking that was evident in just about all the LME metals.
The rot was stopped by copper holding its lows but in aluminium the rebound was also helped by tweaks both at the front and back end of the forward curve.
Fund money continues to flow into December 2011. It has been a constant feature of the light metal for several weeks and some big volumes again changed hands out there last week, noticeably when 3-month prices were under pressure.
That also put a floor underneath the front end of the curve and would-be bears got themselves in a twist again when the market bounced aggressively over the rest of Friday. The front end of the curve—June-July—was bid into small backwardation over lunch-time, triggering a short-covering scramble from the injudicious. The result was a sharp rally back up to $2,875 at the close—a minor week-to-week loss of $15 but a close that leaves the market still poised ominously below the $2,900 level.
Remember that's where the big call option open interest starts for the June strikes and sellers of those options seem set for a rocky ride over the coming days as the time-cushion erodes and the need to delta-hedge moves in the underlying futures market becomes more acute.
By the end of the day June-July ended valued at small contango--$2—but the full cash-to-3-months contango narrowed to $20.25 from $28.50 the previous week and that when the funds were doing their usual monthly rolls, which should serve to boost lending liquidity and cause spreads to slacken.
Producers have so far capped the market at $2,900 and above but their commitment and volumes are being tested all the time.
At the moment this futures and options game is taking place in something of a physical market void. The European market remains robust but the North American market still looks very weak with the latest new order figures from the Aluminum Association—sharp year-on-year and month-on-month falls in all categories—not suggesting any imminent turnaround.
LME stocks remain near their recent highs, the headline figure tracking broadly sideways. The official re-launch of production at the Hamburg smelter in Germany after a year of being in mothballs—is proof that old smelters rarely die, they just rest for a while.
None of this, though, is likely to grab LME traders' attention in the coming days. Contracting nearby spreads, fund flows into the far forward curve and that big options exposure in June are the things they'll be watching. Oh…and the LME's daily compliance reports. As of close of business Thursday, there were two dominant longs—one in the 30-40% band and one in the 40-50% band. Looks like a case of here we go again…again.
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