AMU: Aluminum’s peace trade, one month later

A month later, LME aluminum positioning offers a useful checkpoint on how that trade played out.

In that time, attacks have continued in the region. US Central Command said July 23 the Strait remained open and commercial vessels continued to navigate it.

LME aluminum positioning shifted as prices moved higher following their downward drift through June and early July. Meanwhile, futures trading volume weakened and investment funds’ net length changed little through July before increasing sharply in the latest reporting week.

Prices moved higher from July checkpoint

The July 9 article cited an LME cash settlement price of $3,141 per metric ton (mt) on July 8. By Aug. 11, the cash settlement had increased 7.4% to $3,737/mt. The settlement then fell 1.9% to $3,307.50 on Aug. 12, still 5.3% above the July 8 level.

The previous article noted the cash-to-3M spread moved into a modest contango heading into July. Using the cash bid and three-month bid price, the spread stood at $4.50/t contango on July 8.

That contango didn’t last, posting just two more trading days with a positive spread for the remainder of July. The spread moved into backwardation in the latter half of July and widened to a nearly two-month-wide -$49/t on Aug. 3. Days later, the spread shifted positive by Aug. 5, then between backwardation, flat and contango through Aug. 12.

Backwardation itself was not unusual in the broader period. The curve was backwardated on 51 of the 72 trading days from May 1 through Aug. 12.

The July article captured one of the less common periods of contango in the May-August timeframe. Since then, the spread mostly returned to its more common sign but varied sharply in magnitude.

Overall LME aluminum positioning stayed near July levels

LME aluminum positioning across the four reporting categories totaled about 1.852 million contracts on July 3. On Aug. 7, that total stood at about 1.837 million, down 0.8% from the week ended July 3.

Combined long positions across the four categories were almost unchanged and combined shorts fell about 1.6% over the period.

The latest total also remained nearly 11% below June 5. The contraction described in the July article therefore did not reverse across the reported categories.

Nonetheless, the position and reporting entity mix changed much more dramatically than the gross positions across all market participants.

Aluminum trader positioning changed late

The LME’s price uptick started before investment funds materially added net length. Cash aluminum settled at $3,196/mt on July 31, up 3.8% from $3,080/mt on July 3.

Over the same July 3-July 31 period, investment funds’ net long position slipped to 129,819 contracts from 130,755. Their net position remained essentially unchanged while the cash settlement moved higher.

Despite this, investment funds increased their combined long and short positions by 6.7% through July, while net length remained almost unchanged.

The latest Commitment of Traders report changed the dynamics within a single trading week. Funds increased their net-long position to 140,956 contracts in the week ended Aug. 7. By that point, gross positioning rose by 8% compared to the week ended July 3.

By Aug. 7, fund net long exposure stood at 7.8% above July 3, but it did not represent a monthlong rebuilding of long positions. While funds increased gross positioning from early-to-late July, it was largely through additions on both sides of the market until August.

Other financial institutions made the sharpest move

“Other financial institutions” showed a larger shift than funds over this period.

Their long positions increased 47.8% from July 3 to Aug. 7, reaching 62,789 contracts. Shorts increased 19.7% to 24,034 contracts.

The category’s net-long position increased 73.1% to 38,754 contracts.

Most of that move also came late. Other financial longs stood at 42,765 contracts on July 31 before increasing 46.8% in the next report. Net length increased 60.4% in that same week.

Other financial institutions account for the smallest share of open market interest of the four reporting categories. That said, their 6.8% share of open interest in long positions is the highest in recent memory.

Firms and commercials offset much of that shift

Investment firms or credit institutions still accounted for the largest outright positions in the Commitment of Traders data.

Their combined long and short positions fell by about 22,628 contracts from July 3 to Aug. 7.

While those percentage changes look modest, the category’s size made them consequential in outright terms.

Commercial undertakings moved more sharply. Commercial longs fell 10.4%, while shorts fell 2.9%. As a result, commercial undertakings became 12.3% more net short as long positions fell much faster than short positions.

The two categories reduced their combined gross positions by about 56,797 contracts. Funds and other financial institutions added about 41,649 gross positions over the same period.

Those outright reductions more than offset the increases in the two categories that drew the largest directional attention. Despite sizable moves at the reporting category levels, the open market interest of firms and commercial undertakings explains why total reported positioning was little changed.

LME aluminum trading decreased, then rebounded

Daily futures activity fell after the period covered in the July article. Average futures volume was 278,657 contracts during July 6-10.

The average declined in the subsequent weeks and remained below that level until the trading week of Aug. 3-7.

Average daily trading volume during the week ended Aug. 7 stood at 257,385. The figure was still below the prior-month level but marked a more than 27% increase from the prior week.

From May 1 to Aug. 10, daily futures volume averaged 277,925 contracts. Therefore, the early-August rebound restored some activity without returning turnover to the broader average in recent months.

Options volumes surge in latest sessions

Options volume reached 55,317 contracts on Aug. 10, about 4.2 times the Aug. 3-7 daily average. The uptick was notable against the quiet weeks that preceded it. Though lower than the Aug. 10 figure, the following two trading sessions remained elevated at 41,931 and 34,901 contracts on Aug. 11 and 12, respectively.

There were two periods in early-to-mid May and June that produced higher three-day futures and options trading volume averages. This was roughly six three-day periods between May 8-14 and June 9-12.

But these averages were often distorted by one-day spikes in trading volumes. For instance, on May 12, there were 135,095 options contracts. June 10 had 191,875.

The Aug. 10-12 stretch was unusual for maintaining elevated activity across both futures and options on all three sessions. Futures volume averaged 320,588 contracts per day, while options averaged 44,050.

Stocks kept falling, but warrant stock barely moved

The July article cited 290,825 mt of LME closing stock on July 7. Total closing stock fell 13.4% to 251,700 mt by Aug. 11.

That said, on-warrant stocks fell only 0.7% to 244,575 mt over the same period. Meanwhile, canceled stocks fell 84% to 7,125 mt.

Canceled stock accounted for more than 95% of the decline in closing stock over the period. Major on-warrant declines largely occurred prior to July 7, the latest available data when the previous article was published.

Since the July checkpoint, total stocks continued lower while warranted availability changed little.

Final thoughts

A month ago we asked, “Did aluminum markets price in peace too soon?” The answer is less tidy than price charts suggest.

Prices bounced back while geopolitical risk persisted. LME aluminum positioning shifted late, but the move was concentrated by category and timing. Broader reported positioning, meanwhile, didn’t return to earlier levels.

The late-July backwardation did not line up closely with on-warrant stock movements. On-warrant stocks hardly shifted as the spread widened to -$49/mt on Aug. 3. They changed little again as the curve moved back toward flat and into contango on certain trading days.

Investment fund positioning failed to track the late-July spread move. Fund net length stayed near 130,000 contracts through July while backwardation widened. Simultaneously, commercial undertakings reduced both long and short positions but became more net short as longs fell faster.

If aluminum markets priced in peace too soon in early July, the past month has not produced a simple reversal of that trade. Prices moved first, while the largest changes in financial positioning arrived later and remained concentrated by trader category.