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Aluminum ETF Could Rival Palladium

Aluminum may record a gain of $500 per metric ton, or 24%, if providers of exchange-traded funds introduce ETFs backed by the metal, Citigroup told Bloomberg. According to David Thurtell, a Citigroup analyst, the forecast is based on an ETF holding aluminum that global consumers would use in two weeks, or about 1.4 million tons.

"The abundance of aluminum stocks makes an aluminum ETF more likely than a nickel or copper ETF," Thurtell told Bloomberg.

The move could replicate the performance of ETFS Physical Palladium Shares (PALL). The ETF was launched in January this year and has had an increase of 24% since till date.

According to Daniel Major, commodity strategist at RBS, the inflow of money into palladium ETFs worldwide was equivalent to 28% of estimated palladium consumption in first-quarter 2010.

London Metal Exchange aluminum for delivery in three months closed down 2% at $2,105 a ton on May 11. During the last one month, the metal has declined 15%, retreating from its 52-week high of $2,472 a ton recorded on April 15. The launch of an Aluminum ETF can offset these losses going forward.

On April 21, Rusal, the world's biggest aluminum producer, said it was in discussions to supply metal to banks for possible ETFs. At least three aluminum ETFs are "technically" ready to be offered to investors, said Oleg Deripaska, Rusal's chief executive officer.

London Metal Exchange reported inventory levels of about 4.5 million tons, the highest across metals and almost eight times inventories of second-highest zinc. Although, aluminum inventory levels have fallen 3% this year, they have increased 7% year-over-year.

Other Miners Might Benefit

The appearance of aluminum ETFs on a "significant scale" won't happen until the fourth quarter because of supply constraints, Rusal said. Rio Tinto (RTP), Alcoa (AA - Get Report) and other producers may get involved, the company added.

Since Rusal has to meet its supply commitments, we reckon Alcoa might be a key beneficiary from this development as its utilization rate has come down from 88% in 2008 to 74% in 2009. The company might look to supply some of the metal to the ETF.

This could reflect in Alcoa's earnings going forward. During 2010, the company is expected to report revenue of $20.8 billion, representing a year-over-year increase of 13.0%. Net income is estimated at 73 cents per share compared to a loss of $1.23 per share in the previous quarter. Recently, Deutsche Bank gave a hold rating to the stock with a price target of $15.50.
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