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Aluminum Most Likely First Fund Product, Survey Shows

Aluminum Most Likely for First Exchange Product
Rolls of aluminum bound for shipment are stacked at a port. Photographer: Tomohiro Ohsumi/Bloomberg

Aluminum is most likely to be the first industrial metal used to back an exchange-traded product in a market where $100 billion has already been invested in precious-metal funds, a survey of analysts showed.

Aluminum was the top candidate for 14 of 16 analysts and traders surveyed by Bloomberg. More of it is produced than all other non-ferrous metals combined. Tin was the least likely because it has the smallest stockpiles. ETF Securities Ltd., manager of $22 billion in assets, said today it’s preparing to start exchange-traded commodities backed by six industrial metals including aluminum and copper.

Investors accumulated 2,084 metric tons of bullion since the first gold-backed ETPs started in Australia and London in 2003, based on data from 10 providers tracked by Bloomberg. That’s more than twice the reserves of Switzerland and reflects a wider investor appetite for commodities, with total assets under management rising fivefold to $300 billion since the end of 2004, according to Barclays Capital. Gold holdings doubled since stock markets crashed in 2008.

“People post-crisis have developed a taste for these things,” said Andrey Kryuchenkov, an analyst at VTB Capital in London. “The commodity markets will never be the same.”

Gold is heading for a 10th consecutive annual advance, the longest winning streak since at least 1920, and has risen almost fivefold over the decade. The Standard & Poor’s 500 Index is 12 percent below where it was at the end of 2000. Treasuries returned 75 percent since the end of that year, according to an index from Bank of America Merrill Lynch.

Most-Trade Metal

Ease of trading and stockpiles were the most common reasons for picking aluminum in the survey. The London Metal Exchange handled 4.07 million aluminum contracts in September, 54 percent more than in copper, the next most-traded metal, data from the 133-year-old bourse show. Stockpiles in LME-monitored warehouses of 4.3 million tons are more than three times larger than the combined inventory in copper, nickel, lead, zinc and tin.

Metals traders from Singapore to Santiago gather today for LME Week, with meetings across the U.K. capital. Attendance “is likely to be the highest in a long time,” Gayle Berry at Barclays Capital said in a report Oct. 7.

Speculation about a new product backed by industrial metals intensified after ETF Securities confirmed a month ago it had an LMEsword account. That’s the bourse’s electronic transfer system for warrants, documents issued by LME-approved warehouses giving ownership of metals.

Industrial Metals

ETPs would mean new demand, Daniel Brebner, an analyst at Deutsche Bank AG, said in a report Sept. 28. Based on the “conservative” assumption that an industrial-metal ETP would capture 2 percent of global demand, an aluminum product would need about 13 percent of exchange- monitored inventory, he said. In the case of copper, that would rise to 65 percent, he estimated.

An ETP holding 1.4 million metric tons of aluminum may boost prices by $250 a ton, according to David Thurtell, an analyst at Citigroup Inc. in London. Aluminum for delivery in three months, the benchmark contract, rose $3 to $2,423 a ton at 11:15 a.m. on the LME. The metal rose 8.7 percent since the start of January, extending last year’s 45 percent surge.

OAO GMK Norilsk Nickel, the world’s biggest supplier of nickel, is ready to sell metal to providers of ETPs, Deputy Chief Executive Officer Victor Sprogis said Oct. 4. Oleg Deripaska, chief executive of United Co. Rusal, the world’s largest aluminum maker, said in June that his company and other producers were in talks to supply the metal to a fund.

Storage Costs

One challenge faced by providers of industrial-metal-backed ETPs has been overhead costs.

“You’re going to get eaten alive on the storage costs,” said John Hyland, chief investment officer of U.S. Commodities Funds LLC, which manages about $7.4 billion of assets. Storing gold costs about 0.1 to 0.15 percentage point annually, while for aluminum the figure might be 10 percent, he said.

Those costs could be curbed by either owning a storage facility or negotiating rates with a warehousing company, Barclays’s Berry said in a report.

“The key to success for these products will be the extent to which providers can minimize storage costs,” said Nic Brown, an analyst at Natixis Commodity Markets Ltd. in London.

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