With aluminium lagging other base metals’ spiral in the past year, hedge funds are eyeing this white metal as the next growth avenue for high profitability. Until recently, aluminium was considered a subsidiary to copper for portfolio rebalancing in base metals. Global investment fund houses have gradually started booking it on the benchmark London Metal Exchange (LME).
Generally, aluminium prices move in hand with copper, the LME market leader. The two metals compete in application industries, especially the electrical sector. But in the past year, a recovery in the US economy coupled with supply deficit forecast by the US-based International Copper Study Group (ICSG), raised supply concerns, thereby offering more potential of returns on investment for fund houses. Now, fund houses have realised that most base metals, barring aluminium, have already hit the high price forecast, with little upside bias left in those segments, said an analyst.
Copper prices hit the roof about two weeks before, to surpass $10,000 a tonne on the LME. The red metal has recorded a gain of 36.7 per cent in the past year to February 21, to close at $9,829.5 a tonne. Tin gained the most, 91.7 per cent, in the past year, to close on February 21 at $32,400 a tonne, due to shortage of availability in global markets. Tin is a metal which requires no fundamentals for price movement. ICSG had earlier forecast copper prices to hit $11,000 a tonne by the end of the current calendar year.
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Compiled by BS Research Bureau Source: LME
Rising demand from the stainless steel industry helped nickel prices rise 43.6 per cent in the past year. Since 67 per cent of global nickel output is used for stainless steel production, the future of nickel depends largely upon its user industry.
Lead and zinc have surged 16.1 per cent and 12.6 per cent, respectively, to close at $2,545.5 a tonne and $2,658 a tonne, respectively, on the LME.
Aluminium is the only metal left behind in the race for growth in base metals in the past year, which is why global hedge funds are seriously looking at it, said Jayanta Roy, an analyst with rating agency Icra.
China, US push
Before the global economic crisis erupted in September 2008, aluminium prices had risen to $3,200 a tonne, which sharply fell to below $1,300 a tonne in the first half of 2009. On LME-registered warehouses, total aluminium deposits are currently at 4.6 million tonnes. But the Chinese government’s decision to close smelters with outdated technology, amid rising local demand in the country, is likely to replenish stocks in months to come.
“Therefore, aluminium holds immense potential for hedge fund investment,” said Hitesh Avachat, an analyst with Care Ratings. On an average about 15.7 Kwh of power is required to make a kg of aluminium from alumina. Electricity accounts for nearly 40 per cent of the cost of aluminium production.
This will mean a lot for domestic aluminium producers. Since base metal prices are determined by the movement on the LME, domestic producers will benefit with proportionate increase in prices with the entry of investment funds, said Avachat.
The indication of recovery in the US economy is likely to raise base metals’ consumption, with increased focus on infrastructure and electrical sectors.
The cost of copper production has averaged out between $5,500-6,000 a tonne, nearly half the current prevailing price on the LME. Against that, the cost of aluminum production today is $2,000-2,500 per tonne, almost near the current quoted price.
Also, global base metals producers have applied to the LME for launching exchange-traded funds (ETFs). On approval, the metal’s underlying traded quantity requires to be deposited ine warehouses. This means the ETF segment is also likely to boost demand.
JP Morgan recently said aluminum cost is increasing, whereas alumina and aluminum prices are diverging.
As both Hindalco’s and Nalco’s recent results showed, cost pressures in aluminum are increasing as coal and oil prices increase (impacting carbon costs for aluminum CoP). Interestingly since Sept-10, when LME aluminum price rally started, both aluminum and alumina prices have broadly increased by similar percentage (21-22 per cent), even as alumina sales transactions have become more index linked and de-linked from LME.
