{"id":6441,"date":"2024-12-17T11:36:52","date_gmt":"2024-12-17T11:36:52","guid":{"rendered":"https:\/\/www.alcircle.com\/blog\/?p=6441"},"modified":"2024-12-17T11:37:26","modified_gmt":"2024-12-17T11:37:26","slug":"hedging-with-jorge-episode-17-understanding-theoretical-contango-in-aluminium-markets","status":"publish","type":"post","link":"https:\/\/www.alcircle.com\/blog\/hedging-with-jorge-episode-17-understanding-theoretical-contango-in-aluminium-markets","title":{"rendered":"Hedging with Jorge #Episode 17: Understanding theoretical contango in aluminium markets"},"content":{"rendered":"\n<p>You\u2019ve heard about contango, backwardation, and flat curves before, but let\u2019s revisit these concepts, starting with contango.<\/p>\n\n\n\n<p><\/p>\n\n\n\n<figure class=\"wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<div class=\"youtube-embed\" data-video_id=\"2_rZgZyiQgg\"><iframe loading=\"lazy\" title=\"Hedging with Jorge #Episode 17: Understanding theoretical contango in aluminium markets\" width=\"696\" height=\"392\" src=\"https:\/\/www.youtube.com\/embed\/2_rZgZyiQgg?feature=oembed&#038;enablejsapi=1\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe><\/div>\n<\/div><\/figure>\n\n\n\n<p><\/p>\n\n\n\n<p>At its core, contango occurs when futures prices are higher than the current (cash) price of a commodity. But how does a contango build up? To explain this, we look at the theoretical contango, a structure driven by three key costs:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Interest rates<\/li>\n\n\n\n<li>Storage (warehousing)<\/li>\n\n\n\n<li>Insurance<\/li>\n<\/ul>\n\n\n\n<p><strong>Let\u2019s break it down with a simple example:<\/strong><\/p>\n\n\n\n<p>Imagine aluminium\u2019s cash price is $2,600 per tonne.<br>With an interest rate of 6% per year, that\u2019s 0.5% monthly, or about $13 per month.<br>Add warehousing costs, which are roughly $0.55 per day per tonne, about $16 per month.<br>Factor in insurance, at approximately $1 per month.<\/p>\n\n\n\n<p>Add them up:<\/p>\n\n\n\n<p>$13 (interest) + $16 (warehousing) + $1 (insurance) = $30 per month.<\/p>\n\n\n\n<p>This theoretical cost explains the upward pressure on futures prices relative to cash prices, creating contango.<\/p>\n\n\n\n<p>Now, here\u2019s the interesting part: Have you ever seen a contango with a $90 differential from cash to three-month prices? In reality, the spread is often much lower. Why? That\u2019s a topic we\u2019ll explore next time.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>You\u2019ve heard about contango, backwardation, and flat curves before, but let\u2019s revisit these concepts, starting with contango. At its core, contango occurs when futures prices are higher than the current (cash) price of a commodity. But how does a contango build up? To explain this, we look at the theoretical contango, a structure driven by [&hellip;]<\/p>\n","protected":false},"author":89,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[],"class_list":{"0":"post-6441","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-open-forum-for-aluminum-community-blog"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Hedging with Jorge #Episode 17: Understanding theoretical contango in aluminium markets<\/title>\n<meta name=\"description\" content=\"Contango occurs when futures prices are higher than the current (cash) price of a commodity.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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