Aluminum ETF a strategic extension for banks-Alcoa

Posted by tjdetai on December 18th, 2015


The migration of some of Wall Street's biggest banks into the physical aluminum market is a strategic progression toward the creation of an exchange-traded fund (ETF), the director of material management with the world's largest aluminum producer said on Tuesday.

"There is still plenty of risk capital around to finance metal … It's one of the reasons why the ETFs are becoming more attractive," said Greg Wittbecker, director of material management with Alcoa said on the sidelines of Harbor Intelligence's third annual aluminum outlook conference.

"People are being attracted to more fungible assets … the simple reality is that somebody has to be given the incentive to finance that pile of metal," he said.

The planned launch of a physically backed aluminum ETF between Credit Suisse and Glencore International has opened the door to a whole new world for the investment banks

Goldman Sachs has stepped into the fray as well, with its purchase of London Metal Exchange warehousing company Metro International Trade Services in February.

"It's a natural extension of that strategy that they want to own warehousing capacity as a means of developing their own ability to price that warehousing and make their ETF more successful," Wittbecker said.

Warehousing and financing deals are enabling banks to reap even more money by allowing them to buy cash metal cheaply, sell it forward at a profit and strike a warehouse deal to store it cheaply for an extended period of time.

Financing deals have tied up 75 percent to 80 percent of LME stocks.

With Goldman's financial backing, Metro has recently been seen outbidding rival warehouses in the Detroit area in incentives to attract greater flows of primary aluminum into its warehouses.

"Owning a warehouse gives these banks the ability to migrate into the physical market," Wittbecker said during his panel discussion on Raw Materials, Aluminum Output and Supply Issues. "Owning a warehouse is a great way for people to leverage their flexibility in trading in and out of warehouses."

The ownership also provided them protection against adverse economic conditions, he added.

"Think of a warehouse as basically a metal bank seeking to obtain material. They use rebates as a way of attracting metals toward them and they price that rebate on a counter-cyclical view of what they think of the economy," he said.

"They will pay higher rebates when they think the probability of demand pull for that metal is going to be the weakest, and vice versa… They want more metal because they make their money storing metal.

"It comes from taking a counter-cyclical view of the economy," he said.

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