(Bloomberg) -- A record delivery of aluminum on to the London Metal Exchange has raised the prospect of a new wave of trading games, just a few weeks after the exchange moved to clamp down on a previous play.

Aluminum inventories soared by more than 500,000 tons on Friday, the largest daily inflow in data going back to 1997. The influx was driven by deliveries into warehouses in Port Klang, Malaysia. 

Trafigura Group, one of the world’s largest metal traders, was the key player behind the deliveries, according to people familiar with the matter. The trading house has a long history of shipping significant volumes of Indian metal into Malaysia, the people said, asking not to be identified as the matter is private.

While the metal has been placed on warrant on the LME, it hasn’t yet been trading on the market, the people said. The inflow comes ahead of next week’s “third Wednesday” delivery date — a key liquidity point on the LME — raising the prospect that a significant chunk of the aluminum on the bourse could change hands then. That in turn creates the specter of a queue forming in Port Klang if the buyer of the metal requests delivery.

Trafigura declined to comment.

Queues to take delivery of metal have long been a headache for the LME. A decade ago, the games played by traders, banks and warehouses to maximize their revenues by building up long queues drew fire from US regulators and consumers, prompting the exchange to introduce a series of new rules to clamp down on the behavior. 

The record inflow comes after a month in which the market has been focused on potential trading games around Russian aluminum, after US and UK sanctions prompted the LME to bar deliveries of newly-produced metal from that country. 

A trading opportunity created by the complex details of those rules prompted traders including Glencore Plc and Trafigura to request delivery of large volumes of aluminum, before the LME tweaked its rules. Since then, traders have been unwinding that trade by placing Russian metal back on warrant at the LME.

The latest delivery indicates the market is moving into a new phase. 

The origin of the metal delivered at Port Klang hasn’t been disclosed in LME data, but it was partly driven by the redelivery of 137,050 tons of metal that had previously been ordered out of the port. A further 425,575 tons of fresh metal was delivered in. 

Bloomberg has previously reported that a large volume of Russian metal was ordered for withdrawal from Port Klang in the wake of UK sanctions last month. 

Still, Port Klang has also been a focal point for shipments of Indian metal, according to people familiar with the matter. 

Given the scale of the fresh delivery, it’s likely that a significant proportion of it is Indian. In the 12 months to March 2024, imports of Indian aluminum into Malaysia totaled 396,000 tons, according to data from UN Comtrade, while imports of Russian aluminum in the same period were just 68,000 tons.

An influx of non-Russian metal would be good news for the LME. Even after the sanctions, the bourse has been dogged by concerns that it could become a dumping ground for old Russian metal. The deliveries will also be welcomed by buyers who’ve faced periodic supply squeezes on the LME in recent years — including one last month, when the traders’ orders to withdraw Russian metal dragged readily available stocks to a record low.

The influx of metal didn’t catch aluminum traders entirely by surprise: for months, LME data on “off-warrant stocks” has shown that large volumes of aluminum have been stored privately in Port Klang, which could be readily delivered on to the LME. 

The inflows haven’t had a major impact on prices. Aluminum erased gains after the inventory data, and traded down 1% on the LME at 3:42 p.m. in London.

--With assistance from Alfred Cang.

©2024 Bloomberg L.P.