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Can Aluminum Prices Recover after the Meltdown in May?

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May meltdown

In the last part of this series, we discussed that spot aluminum prices on the LME (London Metals Exchange) declined 12% in May. In this part of the series, we’ll discuss the recent trend in aluminum prices in more detail.

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Contango

The above chart shows the difference between the three-month aluminum forward and spot aluminum prices. On May 29, the three-month rolling future was trading 2.32% higher over the prevailing spot prices. This is the widest difference between spot and future aluminum prices in almost a year.

A positive contango generally bodes well for commodity prices. Please note that when forward prices are higher compared to current spot prices, it’s referred to as “contango.” Fundamentally, aluminum demand has been strong, so far, in 2015. This should also lend support to aluminum prices. We’ll discuss the aluminum demand indicators later in this series.

Financing deals

The current downtrend in aluminum prices also reflects the unwinding of aluminum financing deals. In a typical financing deal, traders buy aluminum in the spot market while selling the forward contract. A cocktail of near zero interest rates and soaring aluminum premiums also aided these financing transactions.

Traders and warehouses were making decent gains in these financing deals, while the end aluminum users had to wait as long as two years to get the physical delivery of aluminum.

Aluminum producers like BHP Billiton (BHP), Glencore (GLNCY), Rio Tinto (RIO), and Noranda Aluminum (NOR) also benefited as aluminum premiums reached record highs. Currently, BHP Billiton forms 0.45% of the Vanguard FTSE All-World ex-US ETF (VEU).

However, the tide also turned upside down for aluminum premiums. We’ll discuss this in the next part of the series.

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