Commodity investors have rushed to profit from a huge glut in the supply of aluminium by buying it up to store and sell for future delivery, reviving memories of the last financial crisis, when millions of tonnes of the lightweight metal piled up in warehouses.
Producers around the world are continuing to churn out aluminium, which is used in everything from beer cans to cars, even though demand from carmakers and other industrial consumers has collapsed. The resulting fall in price is allowing commodity traders, hedge funds and banks to make so-called financing trades — where they buy the metal cheaply, store it in warehouses and sell it in the futures market.
“One of the best risk-free trades in the world at the moment is to get some aluminium and stick it in a warehouse,” said Eoin Dinsmore of CRU, a consultancy. “It’s not just the global trading houses financing aluminium. Everyone sees a good opportunity to make money.”
His comments were echoed by Roman Andryushin, sales and marketing director at Rusal, the biggest aluminium producer outside of China. “We see a strong interest from traders,” he said.
For these trades to work, the price of aluminium for immediate delivery must be below long-dated futures contracts, a market structure known as contango. If the gap is big enough a trader can lock in big profits, after deducting the cost of financing and storage.
The benchmark aluminium price for delivery in three months on the London Metal Exchange has dropped 15 per cent to $1,537 a tonne this year, on fears that supply could outstrip demand by as much 6m tonnes in 2020. In contrast, aluminium for delivery in 15 months is trading around $85 higher.
Oliver Nugent, analyst at Citi, said there were various signals that financing trades were taking off, including the rising premiums for ingot — primary aluminium that is easy to store and can be fashioned into other products.
“That’s telling you there is demand for metal that you can sit on and finance,” he said. “There is free money on the table because the glut is so big.”
The moves are similar to trades seen during the last financial crisis, when huge amounts of aluminium found its way into warehouses licensed by the LME. When demand recovered, long queues formed to take delivery of the metal, which triggered complaints by buyers and an investigation by US regulators.
The LME responded by introducing a new set of rules that cap the rents warehouse owners can charge while metal is waiting to be loaded on to trucks.
Mr Andryushin said the renewed interest in financing trades could lead to shortages of value-added products, such as the rolling slabs used by manufacturers, if more of the metal is piled up in warehouses.
Traders are also reportedly taking advantage of a rare opportunity to sell metal into China, which produces more than half of the world’s 65m tonnes of aluminium.
Shanghai aluminium prices have hit Rmb13,000 ($1,820) a tonne, as industrial activity recovers in the world’s second-biggest economy. Mr Dinsmore expects China will import 250,000 tonnes over the course of May and the first half of June — about one-third of its imports during the whole of 2019.