NEW YORK Speculation is rife over what will happen when
London Metal Exchange warehouse financing deals end and some
5.2 million tonnes of aluminum hits the market.
While some say the price will undoubtedly fall, Alcoa Inc.
chairman and chief executive officer Klaus Kleinfeld disagrees.
The contango will only disappear when interest rates rise, a
sure sign that the world economy and aluminum demand are
rising, he said, meaning consumers will absorb the extra metal.
The first question is why would the contango disappear?
Under what circumstances? Kleinfeld asked during an
Youve heard what pretty much every central bank is
saying around the world. The moment interest rates are going
up, the world economy has picked up again. And the moment the
world economy picks up, you have compensation through physical
demand. The physical demand will be there to pick up the metal.
Im not concerned, Kleinfeld said.
I think this is a new phenomenon that you all have to
build into your models, he told analysts. There is
a new type of investor that is interested in (the) metal as an
Analysts were mixed on whether physical demand would be enough
to absorb this metal when financing games become less
He has a good point. If the contango unwinds, its
probably because interest rates go up and thats usually
because demand goes up, Barclays Capital Plc analyst
David Gagliano told AMM.
I personally have my doubts. Even if there is a global
demand recovery (I think) aluminum lags because this release of
a lot of inventory (would) keep pressure on the metal price.
Either way, the inventory issue is something people need to
watch, he added.
We agree mostly with Klaus commentswhen the
financing game ends, demand for aluminum will be much
stronger, Davenport & Co. analyst Tim Hayes agreed.
Now, will that demand absorb every single tonne? That
remains to be seen. The financing game is not going to end
anytime soon. It will go on ... at least through 2014 if not
through 2015. And when it does end, were figuring it will
end gradually, not abruptly.
Three-month aluminum was at $2,094.50 per tonne Wednesday in