Aluminum Borrowing Fee at 22-Month High Adds to Signs of Metal Scarcity

Aug 17(Bloomberg)--Investors are paying the most in 22 months to borrow aluminum for a day in London and the highest fees in more than six months for tin, adding to signs of scarce supply for both metals.

 

Aluminum's so-called tom-next spread rose today as high as $8 daily for each metric ton, the highest level since Oct. 15, 2008, London Metal Exchange figures show. The equivalent fee for tin touched $10, the highest level since Feb. 5.

 

An estimated 60 percent to 65 percent of LME aluminum inventories are tied into financing accords, according to Deutsche Bank AG. One firm held at least 40 percent of deliverable tin stockpiles tracked by the exchange as of Aug. 13, its latest figures showed.

 

"The spot market is relatively tight because of financing deals still soaking up metal," David Wilson, director of metals research at Societe Generale SA in London, said of aluminum. "There is a dominant warrant holder" in tin, he said.

 

LME stocks of aluminum today rose 1.6 percent, the most in almost 15 months, to 4.45 million tons. A holder who had bet on lower prices may have delivered metal to close out part or all of the so-called short position, Wilson said. He pointed to an LME rule requiring investors to decide whether to take delivery of metal on each month's third Wednesday.

 

Single Holder

 

Aluminum for three-month delivery climbed 2.3 percent to $2,167.50 a ton at 4:03 p.m. on the LME, reducing this year's drop to 2.8 percent. The contract has gained 19 percent from June's 2010 low.

 

One party accounted for at least 40 percent of aluminum long positions expiring this month as of Aug. 13, LME data showed. Three bets on lower prices each held between 10 percent and 19 percent of August short positions, and three more each controlled 5 percent to 9 percent of this month's short contracts. A sole party also held at least 40 percent of aluminum short positions expiring in September.

 

"There are various rumors of players being on either side of the market and a little bit of a squeeze going on," Wilson said. "We might see a little bit more" metal coming into warehouses in coming days, he said.

 

LME stockpiles of aluminum, used in industries from packaging to aerospace, have dropped 3.9 percent this year even after today's increase. A decline for all of 2010 would be the first annual slide in five years for the lightweight metal.

 

Wider Contango

 

Aluminum's contango, the discount for cash metal to the three-month contract, widened to $9 a ton today from the prior session's $4.50, the narrowest level since March 2007, according to LME data.

 

In a market with ample supply, longer-dated contracts are more expensive than nearby futures, reflecting storage costs. The opposite structure, known as backwardation, indicates scarcity.

 

"The backwardation is only in the front part of the curve," Wilson said. "The rest of the curve is still in a significant contango," which would keep drawing metal into financing agreements, he said.

 

Inventories of tin scrutinized by the LME have slid 47 percent this year, the most among the six main metals traded on the exchange, to 14,065 tons. Stocks dropped to a 15-month low on Aug. 13. Production in Indonesia, the world's largest tin exporter, may plunge about 20 percent this year because of bad weather, the energy ministry said on Aug. 11.

 

"Tin is looking quite good for a number of fundamental reasons, with Indonesian exports highly constrained," Wilson said.

 

The metal, mostly used in electrical solders, is this year's best performer on the LME. Tin for three-month delivery has risen 26 percent in 2010 and today reached $21,650 a ton, the highest intraday price since Aug. 22, 2008.

 

"We've seen a big pickup in demand for electronic goods, particularly in China," Wilson said.