Aluminium and other base metal markets are seeing a growing number of traditional and non-traditional players using complex trading and hedging strategies for their international investors, according to Craig Tuckman, managing director of Merrill Lynch Commodities. Those strategies, as well as the growing number of "new" players, are likely to result in more price volatility.

In addition to trend-following funds such as Commodity Trading Advisors, index funds, with more than $150 billion invested in commodities, and private equity funds, are using increasingly complex strategies to generate returns for investors. Other new players include investment banks managing risks for their investors and investor funds doing fundraising for mining equities, he said.

"Understand that this is going to have an impact on day-to-day liquidity," Tuckman said during the Platts Aluminium Symposium 2007 conference in Scottsdale, Arizona.

Other examples of non-traditional players and activity include global diversified miners who may look to extend the life of a particular mine by locking in margins on lower-grade ore recoveries, and precious metals producers who have hedged a significant amount of their base metals production to monetize value at relatively high costs, he said.

If these players holding warrants were to liquidate their positions, "it could create greater cash flow volatility...and could impact the Midwest [Platts] premium," Tuckman said. "There's less metal available, which could create spikes in the premium."

The aluminium market would also be affected if trading went completely electronic, Tuckman said. "We could see aluminium go the way of foreign currency exchange, with a 24-hour trading cycle using electronic trading systems that banks provide," he said,

The number of "new" players using complex trading strategies is likely to create not only greater trading price volatility but also increased trading outside of traditional futures. "We could see investors investing in not only cash and three-months [contracts] but also spreads and options. It can distort the fundamental equation in the market a lot," Tuckman said.