China Aluminium Network
Aluminium financing deals could unravel -analysts
Edited by : AL CIRCLE
2 min read
Financing deals that have tied up most aluminium inventories in warehouses could unravel as the global economic crisis deepens and banks look to unlock funds, said William Adams, an analyst at Basemetals.com, on Wednesday.
"There is a potential for further problems on the banking side of things, whether it's another banking crisis or a liquidity crisis," Adams said at a Sucden Financial press briefing.
"A lot of the banks involved in these financing deals, if they need money they might look around and say, 'There's a lot of money tied up in these financing deals, maybe we utilise some of that.' That's something we need to keep in mind."
Total aluminium stocks in London Metal Exchange-approved warehouses hit a record high above 4.71 million tonnes in May and are currently around 4.6 million tonnes. Financing deals are said to have tied up about 70 percent of those stocks.
In a typical deal, a bank buys nearby aluminium from a producer, sells it forward at a profit and strikes a warehouse deal to store it cheaply for an extended time period.
"I think if we are going to see a crack in the volume of metals under financing arrangement, it will be as a result of liquidity issues," Steve Hardcastle, head of client services at Sucden Financial, told the briefing.
"But the important thing is that there are doubts being expressed about the continuing viability of the financing arrangements, which in turn which may lead to prices easing."
Adams said inventories and production were climbing, with much of the production coming from China, which currently produces 42 percent of world production, up from 25 percent in 2005.
"Overall we think the market is in oversupply. Everybody thinks these financing deals will keep the market distorted, keep metal off the market," Adams said. "I think there's a little to much complacency."
The financing deals that have kept the metal locked away had helped boost European premiums, but those have recently softened because of concerns that Europe will slip into recession.
"There is a potential for further problems on the banking side of things, whether it's another banking crisis or a liquidity crisis," Adams said at a Sucden Financial press briefing.
"A lot of the banks involved in these financing deals, if they need money they might look around and say, 'There's a lot of money tied up in these financing deals, maybe we utilise some of that.' That's something we need to keep in mind."
Total aluminium stocks in London Metal Exchange-approved warehouses hit a record high above 4.71 million tonnes in May and are currently around 4.6 million tonnes. Financing deals are said to have tied up about 70 percent of those stocks.
In a typical deal, a bank buys nearby aluminium from a producer, sells it forward at a profit and strikes a warehouse deal to store it cheaply for an extended time period.
"I think if we are going to see a crack in the volume of metals under financing arrangement, it will be as a result of liquidity issues," Steve Hardcastle, head of client services at Sucden Financial, told the briefing.
"But the important thing is that there are doubts being expressed about the continuing viability of the financing arrangements, which in turn which may lead to prices easing."
Adams said inventories and production were climbing, with much of the production coming from China, which currently produces 42 percent of world production, up from 25 percent in 2005.
"Overall we think the market is in oversupply. Everybody thinks these financing deals will keep the market distorted, keep metal off the market," Adams said. "I think there's a little to much complacency."
The financing deals that have kept the metal locked away had helped boost European premiums, but those have recently softened because of concerns that Europe will slip into recession.
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