COLUMN-A quarter million reasons to be bullish on aluminium: Andy Home

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SymbolPriceChange
TOT53.63+0.65

(Repeats June 10 item; no changes to text)

By Andy Home

LONDON, June 10 (Reuters) - Rusal is bullish about

the aluminium price, believing that "a convergence of physical

and technical factors are now causing a realisation amongst

industry participants and investors that the price is

undervalued".

This is not exactly shock-horror headline news.

Producers of any commodity tend to be pretty bullish about

the market for the stuff they offer. After all, if the Russian

giant weren't optimistic for aluminium's prospects, it would

rather beg the question why is it still in the business,

particularly when the price has been bombed out for so long.

That, of course, might hold a clue as to why Rusal has

reminded everyone why it believes "industry participants and

investors" should be buying aluminium. The company has been

racking up losses, even with the generous dividend flow from its

stake in fellow Russian metals giant Norilsk Nickel, and

shuttering capacity as it tries to lower production costs.

Indeed, this is just the latest in a series of

pronouncements from a company that never tires of banging the

bull drum.

What is interesting about this one is the focus on those

short-term "technical factors". The statement came out on Monday

morning, just after London Metal Exchange (LME) three-month

metal had staged its best weekly close in two months at

$1,879 per tonne.

The only thing that Rusal didn't mention is what might have

provided the impetus for Friday's close.

A SIGNIFICANT CLOSE

It was indeed a significant move for aluminium last Friday,

the price piercing a band of technical resistance in the

$1,850-1,860 range.

To quote from Rusal's statement: "As the price moved through

$1,850/mt on Friday, 'stops' were triggered that initiated

significant trading volume, both covering previous short

positions and creation of new longs, with the market entering a

very constructive phase."

The short-covering momentum carried over into Monday,

three-month metal surging to a near 10-month high of $1,918

before the inevitable profit-taking reaction back below $1,900.

At the time of writing, the price was hovering around that big

number.

A gold badge, it seems, for Rusal's forecasting prowess,

since it foretold that the price could test exactly that level

"this week" and potentially $2,000 "during the next few months".

OPTIONS VOLUMES SOAR

It's evidently not alone because one of the glaring

omissions from its short-term market analysis is where that

Friday surge originated.

That particular piece of the jigsaw was picked up by

analysts at Marex Spectron, writing in the company's "Morning

Spark" research note on Monday.

"At the end of Friday, the market saw a large bullish

aluminium min-max trade put on across the major months of

calendar 2015," they wrote.

A min-max, for those not versed in the esoteric world of

options trading, is the purchase of one strip of options offset

by the sale of another. In a bullish min-max it is calls,

conferring the right to buy, that are bought and puts,

conferring the right to sell, that are sold.

And sure enough, LME data subsequently showed massive

volumes going through the LME aluminium options market on

Friday.

The major components of the day's activity are detailed in

the table below.

6 June Calls Puts

Strikes Volume OI Chg Strikes Volume OI Chg

Mar-15 $1,950 2800 1340 $1,800 2000 1000

$2,200 2000 1000 $1,875 300 150

Jun-15 $1,950 2800 1340 $1,800 2000 1000

$2,200 2000 1000

Sep-15 $1,950 2800 1400 $1,800 2000 1000

$2,200 2000 1000

Dec-15 $1,950 2800 1400 $1,800 2000 1000

$2,200 2000 1000

Total (NYSE: TOT - news) 19,200 9,480 8,300 4,150

Lots

Total Tonnes 480,000 237,000 207,500 103,750

It's clear that upside calls were bought at $1,950 and

$2,200 on each of the quarter ends next year, with the purchase

offset by the sale of $1,800 puts.

THE HIDDEN PUSH

As ever with LME volume figures, they should be taken with a

pinch of salt, since the nature of the exchange's reporting

system can create a double-count problem. The truer scale of

Friday's min-max trade is probably captured by the change in

open interest.

Even that, though, is significant with a total net 237,000

tonnes of major-strike call options added to open interest.

The impact on the futures price would have been two-fold.

Quite evidently, such a large options hit would be

psychologically bullish for those seeing the trade unfold,

simply on the basis that someone, and probably a major market

player, was prepared to bet so big on the upside.

Then there is the more tangible impact that comes from the

need to offset the resulting exposure, whoever sold the options

having to buy futures to "delta" hedge the options position.

Although long-dated, the nature of the LME forward curve

means the $1,950-strike options were close to the money on

Friday and, as of Monday's close, some of them are already in

the money.

The effect would have been amplified by the timing of the

trade, if it was indeed towards the end of the day and that

all-important weekly close.

Nothing wrong with that. Rather, it looks like a masterful

bit of strategic trading, intended to get maximum bang from the

buck.

And nothing's wrong with Rusal's other reasons to be bullish

for aluminium. It is no longer alone in forecasting a market

supply deficit this year, even if its 1.2-million-tonne

assessment is probably towards the top end of the analysts'

spectrum.

It's just on Friday itself there were close to a quarter of

a million very specific reasons to be bullish on aluminium.

(Editing by Dale Hudson)