As regular readers of this weekly item will by now know, the LME aluminium market has a long-standing appointment with a band of upside call options this month, with most observers hoping that one way or another the passage of this Wednesday’s declaration date will see the market shake loose the structural tensions that have held it range-bound for several months.
Battle-Lines
The open interest on the upside June calls has lessened a little bit in recent weeks but as of the start of last week there were still 17,200 lots (430,000t) of $2,900 calls and 12,834 lots (320,850t) of $3,000 calls open on the June date. That’s more than enough to keep sellers of those options nervous as the clock ticks down.
Most on the London “street” remain nervous as to how this long-running battle will play out, particularly after the mass cancellation of 17,725t of LME stocks at Trieste on Tuesday—a tried-and-tested method of tweaking the front end of the forward curve. One collective eye remains firmly on the dominant long position holder that has graced the LME’s daily compliance reports for so long now—still controlling 30-40% of open LME tonnage, according to the most recent banding report as of close of business May 31.
The magnetic pull of those options was evident on Friday morning, when after two days of mostly directionless sideways movement in a tight $2,760-2,790 range, LME 3-month metal punched up through $2,800 for an early high of $2,825.
It couldn’t build on that, however, with technical sellers defending the line. The end-week close at $2,788 was neutral—a week-to-week loss of just $4 and one that suggests the balance of this battle is far from being decided.
Standing in the way of a run-up towards those call options are the technical funds who have been on the rampage throughout the LME complex in the last couple of weeks. They were there again last week, keeping the pressure on. Our fund-watching sources estimate the CTA systematic community—the rank-and-file of the technical fund army—lifted their collective short exposure from around 5% to around 30% of historic capacity over the course of last week.
That in itself has set alarm bells ringing for some London locals. A concerted push to get prices up and through the $2,800 level could, it is feared, trigger many of those funds to buy back positions, causing a rally that then becomes self-sustaining as options shorts have to hedge their exposure against those calls. The only question then is whether the band of producer selling that was previously seen at $2,900 is still there.
Quite how this battle will now play out, or even whether it is the finale of this war of attrition, is uncertain. All we can do is sketch where the battle-lines are drawn.
China Bull
The aluminium market overall seems to be fairly well balanced. Total reported stocks rose again in April bringing the cumulative year-to-date increase to just over 98,000t. Exchange stocks fell in May, but only by a marginal 3,457t with the cumulative year-to-date move still an increase of 137,000t.
But there is one particularly interesting feature of global stocks right now—the speedy decline of those registered with the Shanghai Futures Exchange.
The country’s still-surging production of aluminium coupled with the sharp tail-off of primary exports since the year-start hike in the export tax to 15% had led to expectations that Shanghai stocks would rise.
They did around the time of the Lunar New Year holidays in late February but since then they have fallen steadily. This has led to some head-scratching among analysts but last week we got the chance to hear what Chinese players had to say at an industry event in the country.
Wang Feihong, principal analyst at the aluminium department of state research agency Antaike, predicted that consumption of primary metal would grow by a staggering 35.5% this year.
He conceded that c
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