LONDON, Aug. 16 -- Worries about tight aluminium supplies lie behind the emergence of a premium for cash material on the London Metal Exchange, even though the market overall is flooded with excess material, traders said.
Prices for the August contract, effectively the cash contract, on Monday were $12 a tonne above those for the September contract -- known as the backwardation or premium. That compared with around $10 on Friday and with discounts of around $9 a tonne in June.
Traders said the backwardation, despite oversupply, has fuelled speculation that an entity or entities are trying to boost prices.
"It's more of a trading issue then a fundamentals issue," said one LME trader.
The price difference between delivery on Wednesday this week against the next day was $5 backwardation. The third Wednesday of every month is the "cash" day when settlement is due.
LME market reports showed that as of the close of business on Thursday of last week, one player controlled 30-40 percent of warrants on LME aluminium stocks and cash contracts.
Another LME report showed that as of Thursday there were two significant long position holders and five short position holders for this coming Wednesday.
"Backwardations can be unpredictable in their rapidity of change, which often catches some shorts looking to extend their delivery date," said one metals analyst.
Last year, the scale of large long positions in the LME tin market caused market concern.
LME LENDING GUIDELINES
The LME has the power to step in and force longs to lend by imposing its 'lending guidelines', which are aimed at ensuring orderly markets.
Under these guidelines, if an LME member or client holds 50 percent or more of the warrants or cash today/cash positions, it should be prepared to lend at a premium that is no more than half a percent of the cash price for a day.
The LME declined to comment on whether lending guidance had been invoked on aluminium contracts.
For more on the LME guidance, click: here
LME stocks for the metal, used in transport and packaging, are at 4.37 million tonnes. Expectations are for the market to see a surplus of 1.2 million tonnes this year, while global demand is estimated at around 37 million tonnes.
Analysts noted that the physical aluminium market has been more buoyant than expected during what is normally a low season for demand.
Part of the reason behind the tight market and premium could be financing deals, which have tied up about 70 percent of LME aluminium stocks. These deals release cash for producers and to earn banks higher returns than they would get in money markets.
Plans to launch physically backed aluminium exchange traded products are also expected to take material out of the market.
The premium for duty-paid aluminium in Rotterdam has risen from $10 a tonne in the first quarter of 2009 to about $170 a tonne this month.
Aluminium closed at $2,118 a tonne on Monday. The discount between cash and three-month contracts is about $7 a tonne from $33 a tonnes in mid-June.