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UPDATE: LME WEEK: Jury Still Out On Aluminum ETFs - MF Global

iconOct 12, 2010 10:51
Source:SMM

LONDON, Oct 11, 2010 (Dow Jones Commodities News via Comtex) --The launch of physical aluminum exchange traded products could provide some initial support to the market, but the longer-term implications are not clear, a senior commodity analyst at MF Global said Monday. Speaking at the London Metal Exchange industry week seminar in London, Ed Meir said there will likely be problems for the market bulls after the short-term burst of interest in these products dies down.

"The jury is out," he said. "From an investment point of view, except for the margin element, buying an aluminum ETP unit would entail the same risks of being exposed to an aluminum futures contract," he noted.

At the same time, shifting metal around--a physical ETP would be backed by metal--does not reduce its supply. "A warehouse is not a customer," he said.

His comments come as UK-based ETF Securities said it plans to use its recently established account with the LME's electronic transfer system for stock warrants to launch ETPs for base metals based on warrants.

Producers are keen to see the launch of ETPs based on physical metal, seeing the products as an additional source of demand at a time of high stocks.

"This year there were 129 ETFs set up--37 have closed already and few of them have exceeded the $100 million mark," Meir said. "Having said that, once an aluminum ETF comes about we should see a spike in prices. But that will come back down as the initial euphoria wears off. There could be an initial burst of buying, but I don't know about the long-term."

Meir also noted that it's uncertain how much interest ETPs will generate outside of the institutional players who likely will use it. The costs of rolling positions in contango markets could add up, he added, and ETP's have not been not tested on the way down.

Switzerland's Glencore International SA and Credit Suisse Group are also pushing ahead with plans to launch a physical aluminum ETP backed by off-warrant metal.

"They say the proposed (Glencore and Credit Suisse) ETF (could have one million tons of aluminum, which equates to about $2 billion. But that seems high to me," Meir said. "Despite the buzz in the market...I don't think the market can really support that," he told the seminar.

A number of announcements are likely this week.
 

Aluminum Al
ETF
exchange traded funds
LME market

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