Continued from Part One.
So you could be waiting up to six months for your aluminum, being charged storage all the while, having to finance the stock and insure it. What’s more, consumers are undoubtedly paying a premium for metal both in terms of physical delivery premiums over the LME spot price, and in terms of the actual LME price.
Without the financing deals supporting the market, aluminum prices would be lower than they are today and producers would have to take (admittedly) painful decisions about matching supply to real demand. In fact, the only possible justification for tolerating this ridiculous state of affairs is that the finance deals have slowed the closure of Western smelters, a process that we may, one day, be grateful for if demand roars back on the next cyclical upswing and aluminum demand outstrips supply – you’ll note there are a few “may” and “if” conditionals in there.
The counter argument is that we are paying more in the meantime and consuming electricity to produce metal no one currently wants.
The MB analysis concludes that contrary to the suggestions that these inventory financing deals are in imminent danger of collapse, they are more likely to stay with us to the middle of the decade or beyond.
While not as lucrative as around 2008 when traders and banks were making up to 15 percent gross margins, they are still seeing some 8 percent over a 15-month spot buy and forward sell deal, plenty attractive enough in such a low interest rate environment when treasuries are yielding next to nothing.
You have to ask, though: as banks are coming under retrospective scrutiny for mis-selling products in the past, will we not look back on this in the future and ask how we allowed a few firms to so manipulate the market to the detriment of so many for so long?