Feb. 15 (Bloomberg) -- Aluminum is moving more deeply into contango as both stockpiles and bookings to remove the metal from warehouses monitored by the London Metal Exchange rise to records.
Contango describes a market in which later-dated contracts trade at higher prices than those with nearer dates. The spread between aluminum for three-month delivery on the LME and cash metal was $41.25 a metric ton yesterday, the widest since Dec. 10, 2008. The spread between the metal for 15-month delivery on the LME and cash metal was at $169.75 a ton yesterday, the widest since June 3, 2009, data compiled by Bloomberg show.
"It helps anybody who wants to roll forward the financing deals,” said David Wilson, a London-based analyst at Citigroup Inc. “The wider the contango, the longer interest rates remain low, the bigger is the opportunity for financing.”
Inventories monitored by the LME, up 3 percent this year, rose 0.1 percent to 5.12 million tons today, enough to supply China, the biggest consumer, for about three months. Canceled warrants, or orders to remove aluminum from stockpiles, jumped 24 percent to a record 1.54 million tons, on bookings in the Dutch port of Vlissingen. Canceled warrants more than doubled this year, and account for 30 percent of the LME inventory, a record proportion.
"The level of canceled warrants isn’t actually leading to a significant move out of warehouses, the stockpiles are still getting built,” Wilson said. “It’s a little bit misleading to look at the canceled warrants and suggest there is a tightening in the market when the actual stock levels are still continuing to rise.”
Aluminum has gained 10 percent since the start of the year on the LME and traded at $2,216.25 by 1:28 p.m. in London. It dropped 18 percent last year, the worst performance since 2008.
Consumption contracted 6 percent in 2009 as economies endured the worst recession since World War II, Morgan Stanley estimates. Supply of the metal, used in everything from cans to jumbo jets, exceeded demand every year since 2007 and will remain in surplus until 2014, the bank predicts.
Aluminum stockpiles on the LME may rise “toward” 6 million tons by the end of the year, according to JPMorgan Chase & Co. While aluminum inventories may grow in 2012, most of the metal will remain locked in warehousing deals, meaning availability for consumers will be tight, analyst Michael Jansen wrote in a report Jan. 30. Total aluminum stockpiles will grow to 11.9 million tons this year, or 13 weeks of global consumption, from 10.98 million in 2011, according to JPMorgan.
A financing transaction involves a simultaneous purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango. Financing costs and expenses for storing metal influence profits on the transactions. Financing transactions account for about 70 percent of total aluminum stockpiles, according to Citigroup.