Hedging with Jorge #Episode16: Navigating Contango

In our last discussion, we explored how a contango situation benefits aluminium producers. To recap, contango occurs when the market price for a future date is higher than the nearby or current price. For producers, this is fantastic. They can sell into the futures market at a higher price.

But what does contango mean for consumers? Let’s dive in.

For consumers, contango represents a cost. When hedging, they must pay the higher futures price, which is essentially the price of protection against market volatility. In the aluminium market, contango values typically range from $25 to $50 per metric ton for contracts within three months. Beyond this period, the curve can flatten or decrease, meaning the proportional increase seen in the first three months may not extend further.

So, what’s the strategy for consumers? Think long-term. Hedging for longer durations can help manage costs more effectively, especially when the curve flattens. If you’re an aluminium consumer—say, a foil producer or frame manufacturer—selling at fixed prices means you cannot afford exposure to fluctuating aluminium prices. Hedging through the futures market becomes essential.

While contango might seem costly—easily surpassing broker commissions—it is a necessary expense. Consider this: a typical contango cost of $25–$50 far outweighs broker fees of $2–$3. However, failing to hedge exposes you to unpredictable market fluctuations, which could have severe financial implications.

In short, hedging protects consumers from volatility, turning a necessary cost into long-term stability.

See you next time as we continue to navigate the dynamics of the aluminium market.