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Ebullio fund controls over 90 pct of LME tin -trade

LONDON, 9th Octocber 2009 (Reuters) By Michael Taylor

Ebullio Capital Management's commodity fund controls more than 90 percent of London Metal Exchange tin stocks and cash contracts, traders told Reuters on Friday.

Since early summer, a dominant position has caused the tin market on the LME to become 'disorderly' and distorted prices, traders and consumers said.

'It's a fund called Ebullio ... That's general knowledge so it's not rocket science,' said one London-based trader.

The Essex-based fund is now said to be trying to scale back this large position, with possibly three or four other parties involved, sources said.

Lars Steffensen, the managing partner of Ebullio who is in charge of the team managing its commodity fund, declined to comment.

The latest LME data on Friday showed that a dominant position continues to hold more than 90 percent of stock warrants and cash contracts in tin.

This has pushed the premium, known as a backwardation, for cash material over the three-month future towards five year highs above $700 a tonne in recent weeks. It is currently at about $410 a tonne.

Sources in the tin market have for some months warned that prices do not reflect reality.

However, some market observers said the dominant position holder's approach may make sense.

'It's costly to keep these positions going (but) I think this dominant postion holder is betting that we're going to see much stronger demand from China,' said Gary Mead, senior commodities analyst at Virtual Metals. 'China needs a lot more tin.'

'If the dominant holder has deep pockets, we could see the price of tin going very strongly next year,' he added.

Members of the LME's Tin Committee told the exchange earlier this year it needed to take action.

Frustration with the LME is rife within the tin industry and many think the exchange should have acted before now to neutralise the position.

'It has distorted the market,' another tin trader said. 'I've never seen anything like this ever.'

The exchange declined on Friday to make any comment relating to dominant tin positions.

It has a statutory requirement to ensure that business on its markets is conducted in an orderly manner, providing proper protection to investors.

Previously, the LME has said position limits are a tool for managing the effect of dominant positions in contracts with monthly or less frequent settlements.

Many industrial users of the market say the LME's lending guidance, which limits dominant position holders' ability to profit, should be stricter still. http://www.lme.com/5864.asp.

'This is not a good situation and it certainly is not an orderly market,' a European tin buyer, which makes tinplate -- flat-rolled steel covered with a layer of tin -- said last week.

'To have such a concentration of warrants by one single holder leads to prices higher than the fundamentals.'

Three-month LME tin closed at $14,800 a tonne, a rise of around 40 percent since the start of the year.

Around 360,000 tonnes per year of tin is used globally, the bulk of which is produced by China followed by Indonesia.

Tin stocks in LME warehouses stand at around 26,000 tonnes -- about 26 days global consumption. The tin market is expected to see a surplus of 5,000 tonnes this year.

'It seemed that the dominant position, which everyone says is Ebullio, was 46,000 tonnes,' a trader actively involved in the tin market said. 'Why should anyone be allowed to build up a position of that magnitude? It beggars belief.'

The cost of borrowing metal for one day is quoted at $10 a tonne on Friday from $70 a tonne early last week.

The persistence of a large backwardation despite ample supplies of physical tin could be one reason why the LME's Special Committee may be looking into the dominant holding, one source said late last month.

LME lending guidelines state that if an LME member or client holds 50 percent or more of the warrants or cash today/cash positions, it should be prepared to lend at no more than a premium of half a percent of the cash price for a day.

http://www.lme.com/downloads/Special_Comm_1-6-07.pdf

The Special Committee meets quarterly and includes the LME's head of regulation and compliance Diarmuid O'Hegarty.

The Special Committee can under certain circumstances direct members to close or reduce positions.

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