From the June 2014 issue of Futures Magazine • Subscribe!

Capturing aluminum’s embedded call option

Aluminum market

Just as every long-term physical commodity chart subsuming the inflationary 1970s has a few enormous increases, every chart involving the 2003-08 period reflects China’s construction boom. That boom took a hiatus during the financial crisis and then resumed in early 2009 as China began a short-lived strategic stockpiling campaign for copper, aluminum and other industrial materials.

Chinese imports of aluminum rose from an average of 77,670 metric tons per month in the second quarter of 2008 to 375,020 metric tons per month in the second quarter of 2009 and then retreated to 87,470 metric tons per month in the second quarter of 2010. Monthly imports in the fourth quarter of 2013 averaged 103,843 metric tons and were at 102,550 metric tons per month in January-February 2014.

While the normalized backwardation between LME spot prices and three-month forwards ebbed and flowed with price, the relationship has not been a strong indicator. Backwardation is the expected pattern in physical markets where the cheapest places of storage are with the producer rather than with the buyer. This was the case only for short-lived periods prior to the financial crisis and rarely afterward. 

The implication has been the aluminum market was well-supplied even during the large price rally between March 2009 and April 2011 (see “Not so normal,” below). China was stockpiling metal and driving the price higher during a period of slack demand; whether this is a good money-making strategy will be left for you to decide.

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