Aluminium spreads flash warning sign

LONDON: Aluminium nearby spreads have started flashing a red warning sign for unwary bears. On Thursday last week May-for-a-day, namely the spread between May 19, the third-Wednesday prime prompt date, and May 20, traded at $5 per tonne backwardation.

It wasn’t a blip. As of Friday’s close the same one-day spread was valued at $3 per tonne backwardation. In line with the LME’s two-day prompt system, May 19 has become the cash date today and there’s been plenty more evidence of short-position holders feeling the pain.

In this morning’s first aluminium ring cash-for-a-week, namely the May 19 to May 26 spread, traded at $5 backwardation, while cash-to-June, the spread between cash and the June 16 third-Wednesday date, was bid at $1 backwardation.

The full LME spreads history, by the way, is available on. This tightness on cash metal may seem highly counterintuitive given the fact that there is more aluminium sitting in LME warehouses than any other base metal, 4,474,425 tonnes of it, to be precise.

But once again, it seems, unwary shorts, are learning one of the golden rules of LME trading. In terms of stocks, what you see is not what you get. All that aluminium sitting in LME warehouse is owned by someone. In particular, a very significant portion is owned by financiers, who have locked in the forward contango to earn a rate of return that is unachievable in money markets at the rock-bottom interest rates prevailing across most of the developed world.

How much of the 4.47 million tonnes is locked away in the financing deep freezer? No-one knows for certain but freely available tonnage is being steadily eroded. LME aluminium stocks have fallen by 166,325 tonnes from their January peak of 4,640,750 tonnes.

Moreover, 284,375 tonnes of the current headline total is in the form of cancelled warrants, which is metal earmarked for physical departure and not available to the LME market.

Robust departures and continued cancellations amount to a squeeze on the marginal tonnage in the LME system. The sudden apparition of a backwardation on the May date suggests that some sort of tipping point in this process has been reached.

Now, with the May prime prompt date set to roll off the board, there will be many who dismiss this bout of tightness as a passing aberration. Indeed, the cash-for-a-week spread reverted to contango in the second “official” ringtrading session today. Moreover, with the LME markets apparently crumbling in the broader risk sell-off rout, common sense would suggest it’s the long position holders who are being put to the sword.

But remember, all those enthusiastic bears selling into the current weakness will sooner or later have to take profits (assuming they are lucky enough to do so). Judging by the mini-squeeze on the May date, that may not be quite as straightforward as it seems.

Nor is this necessarily a feature unique to the aluminium market. On Friday nickel saw a brief flash of backwardation on “tom-next”, the shortest-dated spread in the LME trading system.

As with aluminium nickel stocks are high by historical standards. But, as also with aluminium, how much nickel is tied up in financing deals is a moot point.

Complacent bears have just been given a timely warning that high LME stocks do not automatically mean ready availability of metal on any given date. Caveat venditor!