For me, this developing story of the prospective launch of a physically backed aluminium ETF (or maybe ETC), with Credit Suisse and trading giant Glencore as the likely sponsors, has been the most interesting news of the last week. Both the Wall Street Journal’s account of the possible new tracker launch and an earlier Globe and Mail story (quoting Reuters) stress the importance of ETF investors as a source of prospective demand to meet a supply overhang in the aluminium market. Surprisingly, neither version mentions XMTCH (Credit Suisse’s ETF provider) as the tracker’s issuer, although an unconnected Bloomberg story, also from Monday, hints at this.
What’s going on here?
The CFTC’s well-publicised crackdown on commodity speculation in the US is clearly forcing some financial institutions to look at alternative ways of providing trading and investment exposure to raw materials. That means both outside of US trading venues and also in the form of physical ownership, rather than via futures.
Will the future of world commodity trading be in Shanghai, Dubai or even Moscow? If that seems far-fetched, remember that clumsy regulation has pushed markets overseas before – much dollar bond issuance moved to Europe in the 1960s as a response to the US Interest Equalization Tax of 1963, for example. And, of course, the main commodity exporter countries will have a significant say in how the trading infrastructure develops.
But don’t forget the Russian angle in the mooted aluminium ETF, which is an intriguing story in itself. As the Globe and Mail account highlights, Glencore’s involvement in the structure is linked to its acquisition of metal from Rusal, the world’s largest producer. Glencore also holds (via a subsidiary) a 9.7% stake in Rusal. A source tells me that Credit Suisse has looked at involving Rusal in providing storage facilities if the physically backed aluminium ETF goes ahead.
One of the reasons for the lack of precise information on the ETF’s launch date is surely a complicated corporate deal that’s going on in the background. As the Times reported at the weekend, Rusal, which is controlled by Oleg Deripaska, is seeking to float 10% of its shares in Hong Kong by the end of the year. Deripaska is bound by a 2006 commitment to buy out Glencore’s stake in Rusal by the same date, and his financial difficulties as a result of the credit crunch mean that he probably needs the flotation to go ahead to raise the necessary cash. Advising on this deal is…Credit Suisse (with Goldman Sachs). So a successful corporate restructuring will probably go hand in hand with the ETF launch, and in a real sense the aluminium ETF’s debut probably depends on the health of the Russian equity market between now and the end of the year.
Finally, it will be fascinating to see how the new ETF – if launched – deals with the question of storage costs. The advantage of physically backed commodity trackers is that they avoid the problem of having to roll futures contracts on a regular basis, which can result in a substantial return “drift” when the futures curve is in contango or backwardation. For precious metals, storage costs are relatively insignificant, but for industrial metals the costs can be large, and they will need to be made explicit to investors. Having a tie-up with the world’s largest aluminium producer isn’t a bad start – but the devil will be in the detail.