LME aluminium stock financiers tested by tightening spreads
Amid falls in LME holdings and tonnage for physical settlement, analysts warn of impact of tighter spreads on profitability of stocks financing
The enigma machine that is the London aluminium market has shifted gears again.
The front part of the London Metal Exchange (LME) curve has been tightening for several weeks to the point that the shortest-dated spreads are currently in backwardation. This has major significance for the stocks financing trade, based as it is on the ability to generate a return from the shape of the curve.
Metal that was previously queuing to leave the LME warehouse system has been moving back on to LME warrant. It is a sign the latest spreads tension is starting to undermine the allure of a trade that has insulated LME prices and physical premiums from the mountain of legacy stocks overhanging the aluminium market. So far there is no evidence of a broader unwinding of such financing deals.
The latest tightness in the LME aluminium market bears all the hallmarks of a titanic battle between longs and shorts that characterised similar periods of spread tension in the past.
The exchange's market positioning reports currently show one entity controlling 30 to 40 per cent of available tonnage in the LME system, a grip that increases to 50 to 80 per cent once cash positions are included. The market is navigating the August third-Wednesday prime prompt, on which two long position-holders were squaring off against three shorts.
The August battle is at its most intense right now and it is plain to see in the shortest-dated spreads.