HardAssetsInvestor

Written by Julian Murdoch  |

August 23, 2010

Aluminum: A Market Out Of Whack

Details

Soaring inventories and backwardation? What the heck is going on in aluminum? Also: Where's that aluminum ETF already?

When I last wrote about aluminum back in September 2009 (What's In Store For Aluminum?), quite a few things were up in the air for the metal. Price prognosticators called for prices anywhere from $1,700 per metric ton all the way up to $3,000. There was even talk of a physically backed aluminum ETF.

Nearly a year later, we're nowhere near $3,000 and we're still waiting for that ETF—but have the fundamentals really changed that much?

Prices And Inventory

Last week, the aluminum market was just flat-out nuts. Take a look at the LME Official Prices Curve chart below:

On Friday, the aluminum market was in backwardation with a current cash price at $2,040 per tonne, which carried a $14.50 premium on the three-month buyer price of $2,025.50. Backwardation is usually seen when supplies are tight, but when you look at LME inventory numbers, tight isn't a word that comes to mind:

Compared with 2007, inventory levels are up 438 percent to 4.46 million tonnes, although inventories have dropped off slightly in the past 12 months. Global demand for the year is estimated to be at 37 million tonnes, with an expected market surplus of 1.2 million tonnes.

As you can see, aluminum prices don't seem to relate to inventory levels at all—there appears to be a complete disconnect between the two.

So why the backwardation? Trading issues, say LME traders. Bloomberg reported that between 60 and 65 percent of the aluminum in LME inventories are tied up in financing deals. In the Bloomberg article, David Wilson, director of metals research at Societe Generale SA in London said, "The spot market is relatively tight because of financing deals still soaking up metal."

That's bad news for those manufacturers who actually need physical metal to actually, you know, make things. Even still, this probably wouldn't have been a problem, but there have been a couple of supply issues that have taken new metal out of the market.