A major conflict has surfaced in the aluminum market involving some of the biggest dealers and financial organizations in the business. Trafigura Group, a big commodities company, is at the epicenter of this financial storm. Lately, it has been depositing large amounts of aluminum into warehouses owned by London Metal Exchange (LME), mainly in Port Klang, Malaysia. With this action, Trafigura is aiming at big banks and hedge funds like Squarepoint Capital LLP, Citigroup Inc., and JPMorgan Chase & Co. that are buying aluminum and quickly removing it from storage while maintaining a negative outlook on the metal’s price.
The controversy takes place as a result of the massive change in ownership of the world’s aluminum inventory, with over $1 billion worth of metal changing hands in the last few weeks. This burst of activity has rekindled worries about the long warehouse lines and stockpile conflicts that have previously plagued the LME aluminum market. These problems have been controversial, frustrating purchasers and giving the exchange operational difficulties.
Trafigura’s strategy began to take shape over the past year as it accumulated a stockpile in Port Klang, sourced significantly from India through contracts with suppliers like Vedanta Ltd. The visibility of this growing stockpile in LME’s monthly reports didn’t reveal Trafigura’s intentions but hinted at a potential play on physical premiums—where prices paid over the LME spot price rise due to real-world demand outstripping supply.
However, the situation took a sharp turn two weeks ago when Trafigura transferred approximately 650,000 tons of aluminum sitting in Port Klang onto LME warrant, signaling a move to offload this stock onto the market. This action, resulting in an addition of over 500,000 tons to live warrants on May 10, represented the largest single-day delivery onto the LME in nearly three decades.
Just days after these deliveries, Trafigura shared its pessimistic view at a conference in London. Analyst Henry Van expressed concerns over a grim demand outlook for aluminum and noted the impact of recent smelter restarts, which could potentially depress prices further.
In contrast to Trafigura’s gloomy perspective, other traders have become positive. About 400,000 tons of the aluminum that was brought onto the LME warrant were promptly scheduled for delivery out of the warehouses, indicating a strong demand from companies such as Squarepoint, Citibank, and JPMorgan. These companies are responding to what they see as a good buying opportunity, possibly with an eye toward short-term financing transactions or a wager on a tightening market.
Growing investor optimism on the LME, where holdings have changed from being short to the most optimistic in two years, is consistent with this positive mindset. This viewpoint is supported by the expectation of a tightening market in the second half of the year due to a production cap in China and a 3.1% increase in global demand, primarily fueled by needs from China and India.
Furthermore, the metals market has long been witness to the conflict over aluminum inventories. Significant trading moves were made by Trafigura and Glencore last month, taking advantage of fresh sanctions on Russian metal to move substantial amounts of aluminum. These operations show off the traders’ calculated moves as well as the significant financial stakes—storage and handling costs for large quantities of aluminum inventories might reach hundreds of millions of dollars each year.
The market is still tense as aluminum prices continue to rise, having just reached a 23-month high due to Rio Tinto’s announcement of supply problems in Australia. The situation is made more complex by the increasing physical insurance premiums, particularly in Europe, which are a reflection of continuous changes in international supply networks.
