Source: Wall Street News

The London Metal Exchange (LME) has engaged in a high-profile battle for aluminum inventories, with world-renowned commodity trading giant Toke and Wall Street investment banks and hedge funds including Squarepoint Capital, Citigroup, and J.P. Morgan Chase.

On May 25, according to media reports, TOK has delivered large quantities of aluminum to LME in recent weeks, implying its pessimistic expectations about the future trend of aluminum prices. But at the same time, Wall Street institutions, including Squarepoint Capital and Citigroup, have begun to buy these aluminum inventories, betting on expectations that aluminum prices will rise.

In a situation where aluminum inventories may become tight in the future, the market is currently fiercely competing for this batch of aluminum stocks worth more than 1 billion US dollars, and has even changed the global aluminum inventory pattern. Who can laugh until the end?

Is the aluminum market shorting about to happen?

Over the past year, Toke has built up a large inventory of aluminum in Port Klang, partly due to numerous contracts with Indian suppliers such as Vedanta. Often, traders who have accumulated large amounts of inventory will see an opportunity to profit from a portion of the physical premium paid by the buyer above the price on the London Metal Exchange. When demand exceeds supply, location-specific premiums tend to rise as actual consumers of aluminum extract the metal from their inventory.

However, in the past two weeks, Tork suddenly registered about 650,000 tons of aluminum to LME, leading to a huge increase in the number of storage vouchers. This is the largest single-day registration operation in 27 years.

Tork's move appears to be based on its judgment that future aluminum prices will be bearish, while other market participants held the opposite view and quickly purchased these aluminum metals and applied for extraction.

Currently, the views of aluminum bulls are gradually gaining more and more support: LME investors were generally bearish on aluminum prices in mid-March of this year, but now they are turning bullish, and their expectations for the rise in aluminum prices have reached the highest level in two years. The main reason behind this is that the market is expected to face tight supply in the second half of this year due to limited global production and expectations of increased demand driven by China and India.

But Torque's decision to transfer large amounts of inventory to LME has puzzled many competitors in the aluminum market. Due to weak physical market transactions, TOK may think that selling these metals on LME and collecting a portion of the storage fees from future owners is the fastest and most profitable way.

However, as LME introduced rules and restrictions on inventory backlogs, and the long queue at Port Klang has caused some buyers to withdraw their withdrawal requests, the market situation has become more complicated.

So far, traders who are bullish on aluminum prices have had the upper hand. Since Torque began deliveries, LME's aluminum price has increased by about 4%. Aluminum prices reached a 23-month high after Rio Tinto announced force majeure on Tuesday over shipments from two Australian alumina plants.

The copper market experienced a historic shortfall

In addition to the aluminum market, the copper market has also been emptied before.

On May 15, the media quoted people familiar with the matter as reporting that commodity trading giant Tokt and IXM, a subsidiary of China's Luoyang Molybdenum Industry, are trying to buy physical copper to settle their large short positions on the US CME exchange.

Torc and IXM hold large short positions in the COMEX (part of CME Group) copper market, which means they are betting on falling copper prices or hedging their own price risk exposure. But I didn't expect COMEX copper prices to suddenly skyrocket starting Tuesday, causing these short positions to be seriously “emptied.”

By May 20, COMEX's highest copper price hit a record high of 5.196 US dollars per pound, and has soared 33.5% since this year. As of press time, COMEX copper had declined to $4.759 per pound.

editor/tolk