While prices have rallied to similar levels seen in 2H13, the 3 month contango has fallen well below 2% after spending most of the last 9 months at ~2.5%.
The jump in the contango in 2013 seemed to be a function of risk created by the new load-out rules that were supposed to come into affect as of 1 April, although are now delayed thanks to a UK high court decision.
But now it appears that warehouses with large queues for metal are back in the game for accumulating more financed metal. This has pushed premiums a little higher again and has tightened spreads.
Indeed, queues for metal at Vlissingen have jumped sharply as cancelled warrants have surged to record highs.
There has also been fresh metal delivered to the warehouse, with a cumulative 32.5k of metal in the last week or so. This is the first meaningful inflow since the middle of January.
Detroit has yet to see the same kind of dynamic, with no new metal entering warehouses at this location. Indeed, we are now close to cumulative outflow of metal since 1 July 2013.
There is still a large incentive to roll existing and enter into new financing deals even though the contango has narrowed. It seems likely that we will see fresh hoarding of metal at Detroit as well.
To some degree this may help spreads tighten further given increasing competition from different parts of demand. But spreads are likely to remain in contango, with the market still requiring financing demand to sustain current all-in aluminium prices.
