FOCUS: Largest LME aluminium delivery in 4 years to swing spreads back into contango

Aluminium stocks on the London Metal Exchange have increased nearly 30% over the last three trading days, with market participants taking advantage of tightness in the February/March nearby spread.

166,225 tonnes were delivered onto the exchange today, the largest single delivery of aluminium into LME-listed warehouses since March 19, 2014.

“There is backwardation [in the February/March-2018 spread] and someone took advantage of it – when there is a backwardation people tend to deliver onto the exchange,” a trader said.

“The deliveries are linked to the February/March spread backwardation. If the spreads are tight then it does not make sense to keep hold of the metal,” a floor trader added.

Traders told Metal Bulletin that the deliveries are expected to help swing the nearby spreads back into contango.

The February/March-2018 LME spread has narrowed to a $2 per tonne contango from $5 per tonne on Friday February 9, while the benchmark cash/three-month spread has swung to a wider contango since the large delivery, now at $5.25c per tonne.

“The deliveries have an influence on the backwardation, which will disappear. It is already dwindling now,” a market source said.

“An increase in the aluminium deliveries in Asia is because of the backwardation, which has resulted in pressure to liquidate,” a second trader added.

LME aluminium stocks have increased a total 183,800 tonnes since Thursday February 8, with 41,650 tonnes delivered on Friday and 22,175 tonnes delivered on Monday before today’s large delivery.

79.8% of the stocks delivered in over these three trading days has been in Port Klang, with the rest of the metal split between Singapore and Johor – the majority of the metal is ingots.

More deliveries to come?

On-warrant aluminium stocks in LME warehouses were at a nine-year low toward the end of 2017 having plummeted significantly after warehouse reforms in 2013 and 2015.

Although, following today’s delivery some market participants expect even more metal to be delivered to the LME.

“This could be an artificial squeeze, the tightness in March shouldn't be there. But there are always people who purchase during the fire sale in December and are holding and waiting to deliver in February/March... There is likely to be more to come,” a third trader said.

“If it’s not just because of the backwardation and there is more to it, then we will see further deliveries over the next few weeks. Another 100,000 tonnes would not be surprising,” a warehousing source said.

“The general view is that it is being dumped there while China is on holiday – it is all Port Klang material,” a source added.

Physical traders buoyed by deliveries
Traders and sellers on the physical market welcomed the large deliveries – viewing it as a bullish sign for premiums.

Global premiums are experiencing a bull run, but the persistent backwardation has been capping more exaggerated movements higher, with the benchmark Rotterdam duty-unpaid premium steady from the February 5 assessment at $100-107 per tonne, its highest level in a year.

“To me, this move is bullish for spreads and supportive of premiums, which is a good sign,” a trader in Europe said.

Justin Yang, Vivian Teo and Shivani Singh contributed to this article.

Alice Mason

alice.mason@metalbulletin.com

Published

Alice Mason

February 13, 2018

14:50 GMT

London