LONDON, May 11 -- Aluminum may rise by $500 a metric ton if providers of exchange-traded funds introduce ETFs backed by the lightweight metal, Citigroup Inc. said, implying a potential 24 percent gain.
The forecast is based on an ETF holding aluminum that global consumers would use in two weeks, or about 1.4 million tons, David Thurtell, a Citigroup analyst in London, said in a report today. United Co. Rusal, the world's biggest producer, said last month it was in talks to supply metal to banks for possible ETFs.
Introducing investment products would stoke demand for aluminum, which is in greater supply than any of the five other main metals traded on the London Metal Exchange. Warehouses tracked by the exchange hold about 4.5 million tons of aluminum, almost eight times inventories of zinc, which has the second- largest stockpile among the main LME metals.
"The abundance of aluminum stocks makes an aluminum ETF more likely than a nickel or copper ETF," Thurtell said.
Aluminum for delivery in three months fell $65, or 3 percent, to $2,082 a ton at 2:09 p.m. on the LME. The metal, used in industries from packaging to aviation, has dropped 6.6 percent in 2010, paring last year's 45 percent surge.
At least three aluminum ETFs are "technically" ready to be offered to investors, Oleg Deripaska, Moscow-based Rusal's chief executive officer, said on April 21. Financing and warehousing costs are the main obstacles to starting the funds, according to Citibank.
Soaking Up Returns
Storing aluminum in Detroit costs 39 cents a ton daily for the year ending next March, according to the LME. That equates to $142 a year for each ton, or almost 7 percent of the metal's current price. The fees would absorb "too much" of potential returns from aluminum ETFs, Thurtell said.
Stockpiles in Detroit, birthplace of the U.S. auto industry, amount to 925,925 tons, according to the LME.
Citigroup's forecast for aluminum prices is based on the current so-called inventory-to-consumption rate of 10 weeks. Combined stockpiles at exchanges, ports and producers total 7.66 million tons worth more than $18 billion at current prices, Thurtell estimated.