October 14, 2011 / 7:28 AM / 9 years ago

Aluminium short-sellers? Not the villains this time

* Aluminium open interest rising since July, price falls

* Sizable short selling, but not significant

* Fundamentals, precarious economies also to blame

By Susan Thomas

LONDON, Oct 14 (Reuters) - Short-selling, a popular target in volatile and rumour-riddled markets, has been blamed by aluminium producer Alcoa’s chief executive for a big fall in the price of the metal and with it the company’s share price.

“They are betting against aluminum as a proxy for betting against the global economy,” Klaus Kleinfeld said this week, warning of “very offensive short-selling going on by speculators”.

Traders close to the market were more cautious.

“I can’t say I haven’t seen it, I have seen sizeable short selling, but I don’t know if it’s significant enough to justify what he said,” a London metals trader said.

Short selling is a common way for hedge funds and other investors to bet on falling commodities or shares prices.

Benchmark three-month aluminium on the London Metal Exchange has fallen more than 16 percent since July .

At the same time, open interest — the number of outstanding contracts — in aluminium has been rising steadily with a burst higher from around mid-September, partly indicating that investors are taking short positions on the prospect that prices will fall further.

Analysts and traders say this shows many smaller short postions held by a wide variety of investors.

“Open interest is very high, while it’s been rising prices have come off, but we don’t think it’s one person, we think there are a few shorts on aluminium,” a second trader said.

“They’d better be quick about taking profits,” he added. “Prices are already near the marginal cost of production. If they all try to cover their shorts at the same time, the spike up is going to be huge.”

A short position on the LME is not necessarily speculative; producers also take positions. And LME data indicates that there are no significant short players in the LME aluminium market.

The LME’s futures banding report shows four short aluminium position holders at 5-9 percent and one for 10-19 percent for November, while other LME data shows one position holding stocks and cash contracts of 30-40 percent.

VILLAINS

Short sellers are usually vilified in tough times, and this year has been no exception.

In a coordinated attempt to restore confidence in Europe’s fragile economies, France, Italy, Spain and Belgium imposed a ban in August on short-selling financial stocks.

At the height of the volatility in August and September, there were days when base metals fell, in tandem with the euro, stock markets, gold and silver.

“The drop was more to do with people getting out of investments, that was the start of it, because they needed to cover elsewhere, so everything moved suddenly in very high correlation,” the first trader said.

“I don’t know if it was short selling aluminium by speculators but maybe some people thought this is the end of the world, and let’s make money from if before others do.”

In any case, he added, with short selling in some financial stocks forbidden “you have to go elsewhere if you want to short something”.

A physical trader at a large Swiss merchant said there are undoubtably speculative short sellers in the aluminium market, but that is also due to the fundamentals and precarious macro economic situation.

Still, there’s enough short selling to leave more than one person disgruntled.

“Whoever it is, they have a few bob in the kitty,” one veteran LME trader said. “It’s not about supply and demand anymore, it’s who’s got the deepest pockets. I don’t like it.”

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