While not nearly as exciting as JPM cornering and manipulating the gold or silver markets, over the past few years Jamie Dimon’s bank appears to have cornered a very prominent commodity traded on the London Metals Exchange, aluminum, resulting in price “anomalies” which as Reuters politely puts it “mean prices do not always reflect fundamentals” and which as we put it, reflect outright manipulation, however because regulators are captured have so far completely slipped through the cracks.
According to Reuters, large amounts of aluminum traded on the London Metal Exchange over the past couple of years “have at times been in the hands of a dominant position holder.” Citing sources at commodity trading houses, warehouses, producers, brokers and banks “one such position holder is U.S. bank JPMorgan.”
Reuters adds that “other companies have done so in past” which perhaps is meant to mitigate JPM’s culpability, but merely confirms that if it isn’t one bank manipulating commodity markets, it’s another – the famous example of Sumitomo’s Yasuo “Mr. Copper” Hamanaka comes to mind.
As Reuters points out, “while no rules have been broken, holding a large, sometimes dominant position can to an extent have an influence on prices in the short term for contracts that will soon reach maturity.” For its part, the LME said it “would seek additional information from market participants regarding activity that raises concern.”
“If a breach of the LME’s rules is deemed to have occurred, we would take appropriate action.”
We won’t hold our breath.
The details of JPM’s quasi-cornering of aluminum are as follows: the positions have typically meant a backwardation or premium for the nearby contract, suggesting tight supplies. But aluminum is oversupplied and inventories are massive, which mean the natural state of the market should be contango or discount.
It also means holders of short positions, which could be bets on lower prices or hedges for physical holdings, have had to pay more to roll over their positions.
“JPMorgan have been doing this on-and-off for a long time. The
backwardation (or premium) doesn’t accurately reflect oversupply,” a
Reuters source at a commodity trading firm said.
“The positions are large, not many people can do these amounts. It’s worthwhile for JP because they can borrow very cheaply, they have the credit rating,” an aluminum trader at a commodities broker said.
For some months now there have been large holdings of aluminum warrants, which are a claim to metal stored in warehouses approved by the LME. Currently there is a dominant position holding 50-79% of warrants.
One consequence of this is the premium for the cash contract over the benchmark three-month future. It rose to around $23 a tonne in December, the highest since late 2014.
Reuters reveals the following details of large open interest holdings since April 2014 gathered from industry sources.
- FEBRUARY 2016 CONTRACT
One company held 20-29 percent of open interest on February 10, between 403,000 and 584,000 tonnes. Prices on that day value the holding at $596-$864 million. A $5 contango for the February vs March contract became a backwardation of $8 on Feb. 15, 2 days before expiry.
- JANUARY 2016 CONTRACT
One company held 20-29 percent of open interest on Jan. 18, between 238,000 and 346,000 tonnes or $350-$508 million. A $5 contango for the January versus February contract turned into a $8 backwardation on Jan. 19, one day before expiry.
- DECEMBER 2015 CONTRACT
One company held 20-29 percent of open interest on December 14, between 230,000 and 333,000 tonnes or $352-$493 million. A $7 discount for the December versus the January contract became a $31 a tonne premium on Dec. 15, one day before expiry.
- APRIL 2015 CONTRACT
One company held 30-39 percent of open interest on April 8, between 748,000 and 972,000 tonnes or $1.3-$1.7 billion. A $5 discount for the April versus the May contract turned into a $22 backwardation on April 13, two days before expiry
- NOVEMBER 2014 CONTRACT
One company held more than 40 percent of open interest on Nov. 11, more than 1.223 million tonnes or a minimum of $2.5 billion. A $10 contango for the November versus the December contract became a $21 premium on Nov. 18, one day before expiry.
- AUGUST 2014 CONTRACT
One company held 20-29 percent of open interest from Aug. 18, between 224,000-325,000 tonnes or $450-$650 million. A $10 discount for the August vs the September contract became a $16 premium on Aug. 18, two days before expiry.
- APRIL 2014 CONTRACT
One company held more than 40 percent of the open interest on April 9, more than 920,000 tonnes of metal or $1.7 billion. A $15 discount for the April versus the May contract became a premium of $14 a tonne on April 15, the day before expiry.
As a result, we now know that JPM has not only cornered the aluminum market as of this moment – something that very likely will go on indefinitely – but said cornering had lead to the abovementioned “price anomalies.” What is surprising is that according to the CFTC, the LME and various regional regulators this is perfectly normal behacior, and likely happens every day as big banks are given a green light to do whatever they want with any one product.
We wonder if whether having had the above information at hand, U.S. District Judge Katherine B. Forrest would have dismissed the LME, JPMorgan, Goldman Sachs, Glencore and others from recent multidistrict litigation accusing them of manipulating aluminum prices.
If nothing else, at least today’s disclosure of aluminum manipulation answers the implicit question in our post from two months ago, in which we reported that “Someone Is Trying To Corner The Copper Market” on the LME, where the described pricing “anomaly” was virtually a carbon copy of what is taking place with aluminum on the LME.
We now have a pretty good idea of the “who”, and we wonder if that same “who” has also managed to corner by comparable means or otherwise, any other commodity markets, including certain precious metals.
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