To continue our discussion on aluminum markets, scrap trends and prices, we wanted to recap some of the discussion we heard last week at the ISRI Commodity Round Table Conference here in Chicago last week. The panelists, Gary Curtis of Wise Metals Group, Toshi Fukui, TAI Metals Division, Toyota Tsusho America, Mo Ahmadzadeh, Southhold Capital LLC, Lloyd O’Carroll, Davenport & Co. and Joe Sasso, JAS Consulting (the last two recently spoke at the HARBOR Aluminum conference here in Chicago in June) provided insight and support to many of the conclusions drawn in Stuart’s earlier post of today.
The story behind the ISRI conference largely supports the conclusions of the Reuters discussion Stuart referred to, essentially supporting rising aluminum prices through the end of this year and into next year. Mo Ahmadzadeh talked about aluminum versus other base metals, “This market has underperformed the other base metals this year because inventories are relatively high (100 days of consumption on a global basis). The subject of aluminum inventories fed into a discussion about the current aluminum warehousing/finance deals and when specifically inventory could hit the market. Panelist Mo Ahmadzadeh cited the key driver enabling the warehousing arrangement involves the differential between discounted warehouse rent and the yield on money. “Interest rates, so long as they remain low, will enable arrangements to be made in warehousing and material to make it a viable proposition, and like Reuters commentator Andy Home, Ahmadzadeh echoed similar sentiments regarding what will happen to inventory should an aluminum ETF launch later this year, “the material on the LME is remaining there probably because it will be the bedrock/source of material for the ETF. He added that inventory will unlikely make its way onto the open market because it will remain financed and under long term key so to speak.
One question an audience member raised the rationale behind an aluminum ETF gave panelist Mo Ahmadzadeh an opportunity to compare how investors look at gold ETFs, “The rationale behind an ETF may involve political instability, lack of faith in markets, currencies or perhaps the desire to own something that is a hard asset those are the things that are drivers of interest in aluminum as an ETF. He went on to discuss the amount of investor money currently on the sidelines, “A lot of money or investment dollars can’t invest outside of securities. The introduction of PGM ETFs was very successful. Allocating part of your investment portfolio to real assets helps to stabilize and/or reduce risk for one’s portfolio, he continued. He went on to say that ETFs in the form of metal pure plays appear attractive to investors. Ahmadzadeh estimates that an ETF (supported by Alcoa’s CEO) will take one million tons out of the equation.
Lloyd O’Carroll offered some analogies to the gold ETFs as well. In particular, somebody in the audience wanted to know how much “speculation or ETF investment accounted for the gold price. According to Lloyd, some people believe ETFs accounted for $400-500/oz of gold. When asked what other metals ETF’s might work for Lloyd suggested that really only metals with readily available inventory would work which is why copper doesn’t work. And like some of the Reuters columnists, Lloyd also discussed aluminum as an electricity bank or as aluminum in terms of solidified energy? He reiterated China’s aluminum production is at the top of the global cost curve at $2200/ton (the break even point). In his view, aluminum prices will need to hit $2400-2500/ton to earn back the cost of capital.
Another audience member asked about how ETFs would impact volatility in the longer term. Ahmadzadeh suggested that a rise in volatility correlates with the increased use of algorithmic trading and the demise of the LME dealer along with the drop in entities willing to warehouse risk. Nobody cares about a penny a pound anymore according to Mo, instead, “Increased volatility exposes the absolute requirement as to how people price in and price out risk. Mo doesn’t think an ETF increases the volatility. And like the previous round table discussions, Toshi Fukui, summarized the key theme, “obviously we are concerned about volatility, in particular currency volatilityÂ¦ risk management is more and more important the greater the volatility the faster you need to react.