Traders Scramble for Aluminum in a World Saturated With Supply – by Mark Burton and Agnieszka de Sousa (Bloomberg News – November 24, 2016)

(Bloomberg) — The world is awash with aluminum, but on the biggest metals bourse it can be hard to get.

At one point this week, the metal was so scarce on the London Metal Exchange that traders paid the highest fee in four years to roll forward their short positions for one day. That shows the difficulty of buying back aluminum in a market where warehouse inventories are shrinking and one company controls at least half of the available stockpiles and short-dated positions.

The difficulty that metals traders experienced in finding aluminum on the LME may seem odd considering the abundant global supply of the metal. Harbor Intelligence estimates more than 13 million tons of aluminum are held in warehouses outside the LME’s network, enough to supply the U.S. for at least two years.

The problem comes down to a complex, but popular trading strategy on the LME that’s dominated the aluminum market since the financial crisis. It works like this:

Traders have amassed large quantities of metal in warehouses outside the LME to take advantage of a market in contango. They use a strategy known as a cash-and-carry trade that involves buying short-term contracts and sell later-dated ones to capture a profit from the spread.

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