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Traders seek gains in falling aluminium price

Friday, Dec 16, 2011
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One of the hottest trades of the 2008 crisis is making a comeback, as banks and traders take advantage of a sharp fall in the aluminium price to lock up the metal in so-called “financing deals”.
 
 
Several banks have made large purchases of the metal for the deals in recent weeks, and hedge funds are also beginning to look at the trade for the first time, bankers and traders said.
 
 
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The trades rely on a fall in the price of aluminium for near term delivery below the price of longer-dated futures, a situation called “contango”. If the difference is large enough, a trader can lock in profits after the cost of financing and storage simply by buying metal on the spot market and selling futures.
 
 
“Those with available credit can start to fix some very nice returns given the contango,” a senior executive at a large trading house said.
 
 
Benchmark aluminium prices for delivery in three months have slid below $2,000 a tonne for the first time since July 2010, on Thursday trading at $1,975 amid slack demand for the metal, particularly in Europe. On the other hand, aluminium for delivery in early 2014 is trading more than $200 higher – the widest such contango since mid-2009.
 
 
“Demand is quite clearly weakening,” said David Wilson, metals strategist at Citigroup. “Some hedge funds are looking to put money into financing deals; other non-European banks are looking at it as well.”
 
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Bankers and traders said that large quantities of the metal were available in the market. In part, that is because some European banks, under pressure to scale back their activities, are choosing not to renew their old metal financing deals. However, producers, consumers and traders are also searching for banks to finance their excess metal, traders said, in a sign of slowing demand.
 
 
“Could we increase our book by 50 per cent? Yes,” said a senior trader at a leading metals bank. An executive at another major bank added: “The physical market has died a death. We are seeing metal coming out of every corner at the moment.”
 
 
Inventories of aluminium on the London Metal Exchange have jumped 280,000 tonnes in the past week to hit a record 4.8m tonnes. Traders and analysts estimate that total aluminium inventories stand at about 12m tonnes – with much of that tied up in financing deals that were put in place in 2008-09. Global aluminium production is about 40m tonnes a year.
 
 
A trader or hedge fund buying aluminium to put in a financing deal can currently earn an almost risk-free annual return of about 3 per cent, traders estimated.

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