LME Aluminium Market Faces Tightness Amid Position Concentrations and Warehousing Issues
The London Metal Exchange (LME) is keeping a close watch on the tightening aluminium market, where the October contract has experienced a significant shift. A sharp premium has emerged in the spread between October and November contracts, alongside one party holding a large long position in the October market.
"The LME is closely monitoring the tightness in the aluminium market and has the necessary controls in place to ensure continued market orderliness," the exchange said on Wednesday in response to queries.
The premium of LME aluminium for October delivery over November surged to USD 18 per metric ton, up from USD 5.85 just three weeks ago, and a discount of USD 17.50 in July. This premium, known as backwardation, signals tight near-term supply, a situation that has caught the attention of market participants.
In reaction to the LME's monitoring announcement, the benchmark aluminium contract rose by 1.2% to USD 2,680 a ton, marking a near four-month high. Traders expect prices to rise further as the October contract approaches expiry in about two weeks, particularly if short position holders are forced to cover their positions, potentially driving prices higher.
Concentration of Positions and Inventories
LME data indicates that one party holds a long position in October, accounting for over 40% of the market’s open interest, while five parties hold short positions, each representing up to 9% of the open interest. The concentration of aluminium stocks in certain locations is adding to the tightness. Warehouses in Port Klang, Malaysia, currently hold 74% of total LME aluminium inventories, with about two-thirds of that metal being prepared for delivery, leaving limited availability for the market.
The situation is further complicated by the warehousing company ISTIM, which controls 94% of aluminium stocks in Port Klang. Traders have raised concerns over rising fees imposed by ISTIM, with the cost to cancel delivery notices or "re-warrant" metal increasing to as much as USD 27.50 per ton, compared to typical fees of USD 5–10 at other warehouses.
ISTIM declined to comment, but a source indicated that the company recently re-warranted metal at zero cost. The LME stated that it would investigate any reports of unreasonable warehousing charges, as its agreements prohibit excessive fees for metal deposits.
