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JPMorgan Chase is holding more than half of the aluminium on the London Metal Exchange, a multibillion-dollar position that has rattled rival traders and raised questions in London’s tight-knit metal market about its influence on prices.
The bank’s $2bn-plus physical stockpile of aluminium, which could cover 40 years of Coca-Cola’s current UK drinks can output, has been blamed by many traders for pushing up the price of near-term contracts that are about to expire, even though the industry is in its seventh year of a major supply glut.
Big aluminium buyers say the concentrated holding of at least 1.4m tonnes of aluminium stocks has distorted the supply outlook and made it more difficult to use the LME to protect against volatile prices.
“If you looked at the LME without knowing anything you would think the aluminium market is undersupplied, which it is not,” says Robin Bhar, an analyst at Société Générale.
“The build up of surplus metal since the financial crisis and low interest rates means it is possible for a powerful entity to buy a large portion of LME stocks.”
Eight traders, brokers and warehouse owners identified JPMorgan as the owner of the large position to the Financial Times. Its presence can be seen in exchange data that does not identify the owner. JPMorgan refused to confirm or deny if it was the so-called dominant position holder.
The bank has said it trades metals only on behalf of clients, having sold the majority of its physical commodities business to Swiss trading house Mercuria 18 months ago. According to traders, JPMorgan has retained one of the largest metal dealing operations of any bank, as the commodity downturn has accelerated in the past 20 months.
“JPMorgan are not the first and won’t be the last to take large positions in metal,” says Paul Adkins, managing director of aluminium consultancy AZ China.
While the size of JPMorgan’s position is allowed under exchange rules, banks’ involvement in physical commodity trading has come under close scrutiny in recent years.
A US Senate subcommittee conducted a two-year investigation into the role played by banks in physical commodity markets during which time many, including JPMorgan, Goldman Sachs and Morgan Stanley, reduced their presence in the sector. The LME also introduced new rules to reduce lengthy queues at its network of warehouses.
Aluminium prices have dropped 46 per cent since touching a post-financial crisis peak at more than $2,700 per tonne in 2011 because of a supply glut.
It is not clear how JPMorgan has built its large physical position, but since April 2014 trading in aluminium futures contracts on the LME has been marked by periodic bouts of concentrated buying.
On seven separate occasions, exchange data shows, one party accumulated aluminium futures positions equal to 20 per cent to 40 per cent of the contract closest to delivery.
By taking these contracts to delivery and refusing to sell, a party can contribute to pushing spot prices above those for later months. This is a market structure known as backwardation. The opposite structure, known as contango, is usually prevalent in oversupplied markets.
For producers, consumers or traders that might have hedged physical metal through a short futures contract on the LME, this raises the cost of holding on to their position for another month.
In February, the market swung from a contango of $5 to a backwardation of $8 after a large position emerged. That made rolling a short futures contract — buying the front month and selling the next — more expensive.
As a result, some holders of physical metal might have decided to settle their position by delivering aluminium through the LME warehousing system to the traders and banks who held contracts to expiry.
One executive at a large aluminium consumer says it had to adjust its hedging strategy as a result of the backwardations. “It’s a game going on that has a negative impact once again on consumers,” the executive said.
The amassing of a dominant position has become easier because although there is an estimated 15m tonnes of the metal in stocks globally, much of it has left the LME to be stored at cheaper locations elsewhere. This has reduced the total amount of available stock on the exchange.
The LME is also due to bring in new measures to limit the amount of rent that warehouses can charge in an attempt to bring down queues, which will come into an effect at the beginning of May. This has led to increased volatility in spreads.
Asked by the Financial Times about the emergence of a dominant position in aluminium, the LME says it did not identify the owners of the metal on the exchange.
“The LME monitors stock movements as part of our routine surveillance activities, and would seek additional information from market participants regarding activity that raises concern,” the LME told the FT in a statement. “If a breach of the LME’s rules is deemed to have occurred, we would take appropriate action.”
Dominant positions on the LME are not unusual and historically have been unwound with little disruption. The LME has no position limits but has put in place lending rules.
Late on Thursday, the LME put out a notice to members saying it planned to consult on introducing a “more transparent reporting regime for positions that are above certain levels” including asking traders to explain the “rationale” behind large positions.
The UK’s Financial Conduct Authority, which is the LME’s regulator, declined to comment.