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British FCA questions Mercuria on its LME Aluminium Holding

Two sources familiar with this matter claim that the British financial watchdog contacted commodity trader Mercuria to inquire about its large London Metal Exchange aluminum holdings, which have distorted prices of contracts with short maturities.

The LME has not broken any rules, but the disruption of its largest volume market leaves consumers in the packaging, construction, and transport industries without access to aluminium metal and price transparency.

Mercuria, a Swiss company and the Financial Conduct Authority of Britain declined to comment.

Since May, Mercuria has held over 90% of all aluminium warrants. These are documents that confer ownership. LME data shows that as of September 2, its aluminium holdings were more than 421,000 tons. .

According to industry sources, the FCA will likely question Mercuria regarding its aluminium positions at the request of a broker or bank that may have made a complaint, or if the LME refers them.

According to two sources who are familiar with the issue, as well as sources in the industry, the FCA will ask Mercuria about why it holds the metal. The FCA will want to know when it intends to use the metal and what it has planned to do, as this position influences prices for aluminium contracts.

The LME didn't address any questions regarding Mercuria or FCA.

It said that "as per its position management policy, the LME is in place with a number arrangements to guard against undue influences of large or dominating positions. These include lending rules, daily reporting of position and accountability levels."

History repeating itself?

In recent years, the LME has been criticized for its handling of disruptions. For example, the 2022 Nickel Crisis when the market was closed for over a week following a price spike that doubled in a matter of hours to a record-breaking $100,000 per metric ton.

A large company with a high share of LME inventories suggests tight supply and can create premiums or reverses for contracts that are short-dated, such as the cash over three-month aluminium contract. Around $6 per ton.

Near-term metals contracts are typically traded at a discount, or in contango with longer-dated futures. This is because it is assumed that higher prices on the short end or a reversed curve will bring metals to the exchange.

The September premium is higher than the contract for three months. The October November The forwards for the next three months continue to appear even though aluminum has been delivered into the LME system.

The 479,600 aluminium inventories at LME-approved warehouses have increased by more than 40% from late June.

Mercuria's position is a familiar one to many in the aluminum industry.

Sonny Mcness was a JPMorgan trader who, more than a decade before, used a large amount of holdings to implement a trading plan. JPMorgan declined comment.

Mcness has now joined Mercuria, and according to four sources who are familiar with the situation, he is using a similar strategy.

Mcness could not be reached for comment.

Hong Kong Exchanges and Clearing owns the 148-year-old LME.

(source: Reuters)