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The LME serves as a basis on all commercial negotiations in the aluminum market.
Authors observe how closely the LME derivatives are related to physical aluminum markets. They argue the recent increase does not reflect any shortage or a recovery in demand for aluminum, but rather the outcome of the cash and carry trade positions in the LME warehouses.
They conclude with the regulatory risk arising from the new delivery rule in 2015.
Should the LME go through the new rule in 2015, the delivery process will be more transparent and aluminium will be less prone to manipulative actions from banks.
The new rule would result in a liquidation of inventories and falling prices thus discriminating aluminum smelters.
Authors Mamoudou Diallo and Fioloyimi Kakpo are undergrads students in Finance at Université de Moncton in Canada.