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The aluminum market is caught in a clash between some of the biggest traders and banks, with more than $1 billion of metal changing hands while lengthy queues form at London Metal Exchange warehouses.
The events of the past few weeks have been the climax of a trade that began many months ago. Trafigura has been accumulating a stockpile of aluminum in Port Klang over the past year, much of it from India where the trading house has large contracts with suppliers including Vedanta Ltd. A few days after the deliveries began, Trafigura laid out its bearish outlook at a conference in London. Analyst Henry Van predicted that aluminum prices would fall, saying it was seeing “a very grim demand picture right now,” and noting recent smelter restarts.
Inventories remain relatively low, while production in China is nearing a 45 million-ton-per-year cap imposed by Beijing. Add in forecasts for demand growth of 3.1% this year — led by demand from China and India — and the market is set to tighten in the second half of this year, according to CRU Group.
Traders delivering large volumes to the LME generally enter “rent share” deals with the warehouse company they’re delivering to, meaning they earn a share of the revenues for as long as the metal stays in the warehouse. At a rent of 56 cents a day, the total rent on 650,000 tons of aluminum could be worth as much as $133 million a year — more than $200 a ton — as long as it stays where it is.
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