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Metals Investors Had Nowhere to Hide in Volatility Surge -- WSJ

12 May 2018 6:32 am
By Amrith Ramkumar 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (May 12, 2018).

Volatility in the aluminum market from geopolitical uncertainty is roiling investors who hedge their positions to lock in prices--a development that could cause more turbulence.

Prices swung wildly after the U.S. sanctioned Russian aluminum giant United Co. Rusal , the world's second-largest supplier. About two weeks later, the U.S. hinted it might relieve the measures if Rusal majority owner Oleg Deripaska sold his stake, which he agreed to do.

Many metal producers use futures and options to manage their risks in the physical market and guarantee prices for their output.

Before the Russia announcement, aluminum futures for future months and years had been more expensive than current prices. The reports prompted some producers to try to sell longer-dated contracts on fears that prices would drop immediately from a rapid run-up.

But that condition, known as contango, flipped dramatically as traders sold longer-dated positions, pushing down those prices and making near-term prices more expensive.

Although some producers would likely benefit from those conditions, since they'd get more for their output in the near-term, traders said the rapid price shifts and one-sided positioning likely limited gains. Aluminum stayed above $2,700 a metric ton for a matter of minutes on April 19 before closing at $2,485. Traders said hedgers often struggled to find a counterparty to buy much longer-dated positions given the uncertainty in the market.

"Most people weren't trading unless they needed to because the moves were unpredictable and extraordinary," said Tai Wong, head of metals trading at BMO Capital Markets. "People who benefited from a higher price got some hedges off, but not nearly the amount and not nearly as thoroughly as they would have wanted to."

Abrupt price moves in the industrial metals market returned this week as traders and investors anticipated President Donald Trump's decision to withdraw the U.S. from a nuclear deal with Iran.

Some analysts said consumers of metals, like manufacturing companies hoping to neutralize swings, have also been buying futures contracts, adding to the market gyrations that are currently playing out.

Metals users have also chosen to load up on physical metal rather than using futures. They're worried about having enough aluminum to continue building products for their businesses.

That strategy has led to sizable swings in stockpiles around the world, which has stoked further volatility.

Complicating the situation further, some investors remain wary of using Rusal metal. The Interfax news agency reported last week that Rusal exports fell nearly 70% in April from a year earlier.

"It wasn't really just the price that people were concerned about it, it was the sheer availability of the metal as well," said Oliver Nugent, a commodities strategist at ING. "The consumers were those who were very frightened.... It was very hard to keep people calm."

(END) Dow Jones Newswires

May 12, 2018 02:32 ET (06:32 GMT)

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