Aluminum Set to Drop as Financing Accords Unwind, Tiberius Says
Aluminum is poised to decline when investors start to unwind financing transactions that have tied up the majority of London Metal Exchange stockpiles, according to Tiberius Group.
Following are comments from Christoph Eibl, who helps manage $2.5 billion of assets at Tiberius in Zug, Switzerland. He spoke in an interview in London on Oct. 26.
As much as 80 percent of LME aluminum is locked into financing accords and unavailable to the market, according to Credit Agricole SA. The transactions involve a simultaneous purchase of metal for nearby delivery and a forward sale to take advantage of a contango, when contracts with later delivery dates trade at higher prices than nearer-dated metal.
“Aluminum is not scarce. There is enough aluminum around. But looking at aluminum, you realize that there is so much on stock, but there is so little available.
“It’s an engineered market, and that’s why the market is trading in such a tight range.
“We are very negative. As soon as these financing games get undone, aluminum will significantly correct.
“With some of the supply, we are at marginal cost of production, and marginal cost of production usually means you want to invest, but there is so much available, so we don’t feel there is a potential spike to the upside.”
On financing transactions:
“Warehouse operators and suppliers to consumers are playing an unethical game by squeezing the end users for their own good, and this is a conflict of interest that will be addressed in the long run.
“There is so much pressure from the end users, from the exchanges at a certain stage, that I think if I were the one playing this game, I would try to lower it now. I would not increase it.
“By cutting production, by sending more production on stock, you’ll get all of your consumers against you. It’s also about client relationship.”
To contact the reporter on this story: Maria Kolesnikova in London at mkolesnikova@bloomberg.net
To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net
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