All Aboard the ETF Express

by on

Many of us have been wondering what will happen to aluminum when the current financing deals unwind in the spring of next year. Metal has been sold for May delivery and stored under discounted storage deals in LME warehouses to take advantage of the price premium delivery 12 months forward contracts were exhibiting over spot plus finance in the spring of this year. It was a convenient way to park and hold up to 3 million of the 4.5 million tons that is currently reported in LME stock. It was probably not Glencore’s primary intention to create an ETF to soak up this over stock but it just so happens they are sitting on 800,000 tons and are reported to be in discussions with Rusal to take on a further 500,000 tons ” not out of the goodness of their heart you will understand, they are probably taking metal instead of funds they are due.

However, the report last week that Glencore and Credit Suisse are intending to launch a physically backed Electronic Traded Fund ETF would coincidentally have the benefit of soaking up some of those hundreds of thousands of tons of metal. If Glencore raise their holding to 1.3 m tons it will represent 3.5% of world production according to a Reuters article. Usually ETF’s are supported by futures contracts rolled over on a monthly basis which has drawbacks in terms of trading costs and distortions. Physically backed precious metal funds are more common because of the low storage cost relative to the value. The SPDR Gold Trust the world’s largest gold-backed security, holds around 1086.5 metric tons of gold, and ranks as the world’s sixth largest holder of gold. Physically backed funds are generating increasing interest. Canada’s ScotiaMocatta last month released details of the world’s first physically backed copper fund.

To what extent a physically backed fund would reduce the market price volatility that many blame on the ETF’s is open to question. In theory it would be harder to buy and sell if physical delivery is required and its interesting that the rise of physical funds is happening just as some are questioning the traditional model in light of possible new regulations being imposed following the report the CFTC and SEC have to give to Congress on September 30. The reality is ETF’s in one form or another are here to stay and their scope and activities are becoming as relevant to the metals markets as is supply and demand fundamentals, certainly for precious metals and increasingly for base metals.

–Stuart Burns

Comments (2)

  1. MARK BODNER says:

    very accurate picture of the aluminum market dynamics. I agree it’s bullish for the price as well as for Glencore and company when the new ETF starts trading and luring in the ”investors” who will be always long.

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.