LME Asia week in Hong Kong is a strange marriage between financial and physical players, though the balance seems to be on the financial side. That is more and more true in the market as well.
All of which leads me to speculate, when will the pendulum swing the other way, and what might cause it to shift? Or more precisely, who? Will we ever see the physical market resume its former importance?
In the aluminium market, it is hard to see any producer could possibly take a lead, and bring the market back to a more physical basis. Rio Tinto has split its aluminium assets into two and written of billions of dollars from their value. Chalco is losing boat loads of money, to the point they are moving assets off their books. Alcoa has declared exceptional losses the last several quarters, and Rusal is deep in debt.
Yet the metal itself is a valuable commodity, and is essential to both the developing economies (in the infrastructure, electrical and transport sectors) and to the developed economies (especially in packaging and transport sectors.) Not only that, metal premiums remain very high, despite the metal price itself being depressed.
Right now there are some millions of tonnes of aluminium sitting in warehouses, under the control of those who can take a physical position. With low interest rates and a healthy contango, it makes sense to hold the metal off the market. The combined costs of interest and warehousing still leave enough profit in the contango to make it worthwhile to hold the metal.
Those who actually consume the metal still need to get their supplies, so they end up paying a premium. The bottom line is that the net amount of money paid must now be shared between the producer and the new class of middleman – the financial player.
The surprise in all of this is that middle men have not sought to increase their split of the price, and why producers haven’t sought to improve their share of the same pie.
As I mentioned earlier, producers don’t have the cash to mount a fight to improve their revenue split. But I wonder when the middlemen will start to move further into the game, and increase their take from that pie?