Tuesday, May 28, 2024

Warehouse Trade Mark III: "Trafigura Faces Off With Aluminum Bulls Over Huge Metal Stash"

Back in the day—2011-2013—it was Goldman (and Glencore) garnering the headlines.

Now it seems to be Trafigura at the heart of the skullduggery.

First up, Bloomberg, April 19, 2024:

Glencore and Trafigura’s Sanctions Games Are Draining the LME

  • Orders to withdraw aluminum jumped sharply this week
  • US and UK have announced new restrictions on Russian metal

The world’s two biggest metals traders are moving to withdraw large volumes of aluminum from the London Metal Exchange in a complex trade made possible by new UK sanctions on Russian metal, raising questions about unintended consequences from the new rules.

Trafigura Group and Glencore Plc plan to withdraw the metal to profit from a new multi-tiered system created by the sanctions, according to people familiar with the matter. The trade involves ordering out Russian metal and then re-registering it on the LME under a new, less-desirable category, while striking profit-sharing deals with warehouses to receive a sliver of the rent paid by future owners for as long as it sits there. (The longer it sits, the more money they stand to make.)

Read: Traders Are Already Gaming the New Russian Metal Sanctions

Nearly $400 million of aluminum was requested for withdrawal this week from warehouses in South Korea and Malaysia, according to LME data, driving live inventories in the warehouse system close to a record low. Trafigura and Glencore have both been behind orders for withdrawal of aluminum this week, according to people familiar with the matter.

The play, which has captured the attention of the global metals world, raises questions about whether the UK government was aware of the opportunities it was creating for traders to game a complex set of rules imposed by the sanctions last week.

The nature of the trade means that the metal will ultimately be placed back on the LME. But the restrictions have added new layers of paperwork and approvals as traders must prove the provenance of the metal they are registering, which is likely to slow down the process and keep LME inventories lower for longer....


And Bloomberg again, this time May 25:

  • Trader was behind large deliveries to the LME this month
  • Buyers including Squarepoint and Citi have ordered metal out

The aluminum market is caught in a clash between some of the biggest traders and banks, with more than $1 billion of metal changing hands while lengthy queues form at London Metal Exchange warehouses.

The big bear in the market is Trafigura Group: the commodities trading giant has delivered massive volumes of aluminum onto the LME in recent weeks while touting its downbeat view.

On the other side stand banks and hedge funds including Squarepoint Capital LLP, Citigroup Inc. and JPMorgan Chase & Co., which have responded by buying up Trafigura’s metal and ordering it back out of the warehouse system, according to people familiar with the matter.

The result has been a major change in who owns the world’s aluminum inventory, at a time when some are predicting shortages ahead. It’s also heralded a return of the stockpile battles and warehouse queues that have been regular hallmarks of the LME aluminum market, causing controversy among buyers and headaches for the exchange itself. The ballooning backlogs at facilities in Port Klang, Malaysia, mean that traders could now have to wait many months to take delivery of stock.

The events of the past few weeks have been the climax of a trade that began many months ago. Trafigura has been accumulating a stockpile of aluminum in Port Klang over the past year, much of it from India where the trading house has large contracts with suppliers including Vedanta Ltd.

Trafigura’s trade wasn’t a secret: the growing stocks of aluminum in Port Klang — a key global hub for aluminum storage — were visible in the LME’s monthly reports on metal stored outside its network of warehouses.

But nobody in the wider aluminum market knew exactly what Trafigura would do with the metal. Often, traders accumulating large stashes see opportunities to profit from increases in the physical premium that buyers pay over and above the LME price. If demand outstrips supply, the location-specific premiums tend to rise as real-world consumers of aluminum draw down metal that’s held in stockpiles.

Instead, in the past two weeks, about 650,000 tons of aluminum sitting in Port Klang was suddenly transferred on to LME warrant. Trafigura was the key player behind the deliveries, which led to an increase in live warrants of more than 500,000 tons on May 10 — the largest single-day delivery onto the LME in at least 27 years.

A few days after the deliveries began, Trafigura laid out its bearish outlook at a conference in London. Analyst Henry Van predicted that aluminum prices would fall, saying it was seeing “a very grim demand picture right now,” and noting recent smelter restarts.

Read: Trafigura Says Aluminum Rally Is ‘Over Done’ as Supply Returns

But other traders are taking the opposite view. Of the metal delivered on to LME warrant in the past two weeks, about 400,000 tons — worth about $1 billion at current prices — was quickly requested for delivery out again. The buyers include hedge fund Squarepoint, and banks like Citi and JPMorgan, the people said.

In the short term, the buyers of the aluminum in Port Klang are likely to use it for so-called financing deals — holding physical aluminum and selling higher-priced futures. But in the longer term, the biggest payoff for the trade would come if the physical market tightens to a level that allows it to be shipped to real-world buyers for a profit....