• Aluminum

“Banker grab” hits with backwardation.

Aluminum locked up in long term financing deals could be released as a result of a backwardation that has emerged in the August-September forward prices on the LME, market sources told AMM.

The emergence of higher prices for August compared with September is a dramatic reversal of the healthy contango that has existed for the past 2 years and prompted the long term financing deals that tied up millions of tons of aluminum in warehouses. The financing deals only make sense when the costs of financing and rent are covered by the healthy contango.

Some banks with long positions are said to be unwilling to lend which is fueling the backwardation and leaving shorts with few options other than to release metal.

Most of the nearly 4.4 million tons of aluminum in LME warehouses and as much in off exchange deals is rumored to be tied up in long term financing deals. Aluminum is locked up and it’s not available in a contango, but it will be available in backwardation the market source says.

The idea is you get more value than what is costs you, said a physical trader, describing the tactic as a “banker grab”. Only banks with financial firepower would be able to create this kind of squeeze.

The backwardation may evaporate by the third Wednesday prompt dates, but there is nothing to stop another squeeze in the future market participants said.

Excerpts from American Metal Market. July 16th, 2010