Hedging with Jorge #Episode20: Contango to Backwardation, lessons from the aluminium market

As we step into 2025, let’s explore a fascinating shift in the aluminium market: how a typical contango can transform into backwardation.

Contango in Aluminium: In a normal aluminium market, the three-month price is historically higher than the cash price—a classic contango. This reflects costs like storage, insurance, and interest. However, this equilibrium can shift under specific circumstances.

The Shift to Backwardation: Backwardation occurs when nearby prices rise higher than future prices. This shift doesn’t happen overnight—it’s often triggered by significant events.

One such event was the conflict between Russia and Ukraine, nearly three years ago. Russia, producing over 1 million tonnes of aluminium annually, faced sanctions, causing market fears of reduced supply. The result? A sharp rise in nearby aluminium prices, skyrocketing to $4,130, while the three-month price lagged $300 lower.

The Reversal: Interestingly, within three months, the market returned to contango, and prices normalized around $2,500. This dramatic fluctuation highlights how external factors, market sentiment, and supply dynamics shape aluminium pricing.

What’s Next?

In our next discussion, we’ll dive deeper into why markets swing between backwardation and contango. Stay tuned, and here’s to a prosperous start to 2025!