(Bloomberg) — Some of the world’s biggest energy traders are making waves in global metals markets by taking positions so large that they prompted questions from the London Metal Exchange.
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Vitol Group and Gunvor Group have both taken long positions in the past few months in the LME aluminum contracts nearing expiry that were at times larger than the readily available stock in the exchange’s warehousing network, according to people familiar with the matter, who asked not to be identified as they weren’t authorized to speak publicly.
A push into metals by several giants of energy trading has been the talk of the industry in the past year, as the firms embarked on a hiring spree that drove up salaries and bonuses. But this is the first time they’re playing a major role in the markets, challenging the dominance of incumbents Glencore Plc and Trafigura Group.
Read: Metal Trader Hiring Frenzy Sends Bonuses Soaring Amid Talent War
The positions were in contracts that have since expired, and it’s not unusual for big traders to take large positions on the LME in an attempt to secure relatively cheap supplies of physical metal. Vitol and Gunvor’s recent entry into the market means they don’t have the longstanding contracts to buy direct from producers that more established traders do.
The LME’s contracts are physically deliverable, meaning that while the large majority of positions are closed out before expiry, traders can hold onto positions to receive physical metal in an LME warehouse somewhere in the world. Doing so, however, can cause strains in the market, squeezing other market participants with short positions.
The aggressive moves by Vitol and Gunvor caused consternation among rivals and helped push spot aluminum prices to a premium over futures for delivery in three months — a hallmark of a tight market.
The LME has asked both Gunvor and Vitol about their aluminum positions in recent months, the people said. The exchange asks traders with big positions in contracts nearing expiry how they intend to handle them without disrupting the market — a step that’s often used as a way to encourage them to reduce their positions.
Vitol and Gunvor declined to comment. A spokesperson for the LME said the exchange routinely requests further position management information from market participants “and has the power to require positions to be managed as appropriate.”
