Previously, we noted that aluminum prices are trading near their six-year lows. Falling aluminum prices have taken a toll on aluminum producers’ earnings. The 2Q15 earnings of Alcoa (AA), Rio Tinto (RIO), and Vale (VALE) were negatively affected by falling aluminum prices. Alcoa, which is the leading aluminum producer in the United States (IVV), forms 4.47% of the SPDR S&P Metals and Mining ETF (XME).
In response to falling prices, several aluminum producers hedge their revenues by going short on forward aluminum prices, thereby locking in their future revenues. However, in the process, these companies also lose any potential rise in aluminum prices.
Commitments of Traders Report
The LME (London Metal Exchange) releases a weekly COTR (Commitments of Traders Report). This report highlights the long and short positions held by various market participants. LME classifies market participants into five broad categories:
- Producer, Merchant, Processor, or User
- Broker-Dealer or Index Trader
- Money Manager
- Other Reportables
- Not Defined
Aluminum producers cut short positions
Participants in the first category, including aluminum producers, have cut their short positions over the last couple of weeks. As of the week ending July 31, the category was short on 322,405 contracts—a fall from the 6,810 contracts reported the previous week. Please note that one contract is equivalent to 25 metric tons. The short positions by aluminum producers have fallen steadily, as seen in the chart above.
Fewer short contracts by aluminum producers suggest that they are anticipating a rise in prices.
Meanwhile, what do money managers think about aluminum prices? We’ll explore in the next part of this series.