Aluminum spread jumps again as traders eye Trafigura position

The price difference between October and November aluminum contracts on the London Metal Exchange jumped on Monday to a premium of as much as $18.88 a ton, in a condition known as backwardation that typically signals tight spot supply. The spread started trading at a premium in late August, and Monday’s sharp bounce took it to the widest ever.

The LME has received complaints from traders who say the tightness in the October-November spread is being exacerbated by a move by warehousing firm Istim Metals LLC to raise the fees that traders would need to pay to re-deliver aluminum that has been ordered out of warehouses in Malaysia. A number of traders are stuck in a months-long backlog to load out a large stockpile of metal originally delivered onto the LME by Trafigura in May.

Now, the backwardation is putting pressure on some of the traders, as they need to roll forward hedges against their inventories. Normally, it would make sense to simply re-deliver the metal onto the LME, but Istim has said it may charge $27.50 a ton for the service.

Traders are also focusing on a single large long position in the October aluminum contract, which Bloomberg reported on Sunday is held by Trafigura. The company has bought up at least 30% of the outstanding October contracts, which expire in two weeks time.

Istim and Trafigura have both previously declined to comment.

Together, the backwardation and the increase in fees have revived questions about the potential for conflicts of interest between storage companies and their biggest customers. It’s common practice for warehouses to offer a large slice of their rent — often about half — as an incentive to the trader that originally delivered the metal, for as long as it remains in the warehouse. That means both parties stand to benefit the longer the metal stays put.

At least one party has complained to the UK’s financial regulator, Bloomberg reported on Sunday.