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 earnings call.
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 investment.
Analysts were mixed on whether physical demand would be enough to absorb this metal when financing games become less attractive.
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 LME officials.