In our previous discussion, we explored the concept of theoretical contango and its construction. Let’s quickly recap and expand on this idea with a comparison between aluminium and copper.

Aluminium: The Basics of Theoretical Contango: Using aluminium as an example, we started with a cash price of $2,600 per tonne. If you buy aluminium immediately, you incur costs such as:

1. Interest Rate: At a competitive 6% annual rate (equivalent to 0.5% per month), this adds $13 per tonne.
2. Storage Costs: Warehousing typically costs $15 per tonne per month.
3. Insurance: A small addition, approximately $1 per tonne per month.

Together, these costs amount to $30 per tonne per month. Over three months, this totals $90, yet contango in aluminium markets often doesn’t reflect such high differentials.

Copper: A Similar Framework, Bigger Numbers: Switching gears to copper, which trades around $9,000 per tonne, the calculations differ slightly:

1. Interest Rate: At 0.5% per month, this contributes $45 per tonne.
2. Storage Costs: At 55 cents per day per tonne, this adds roughly $15 per month.
3. Insurance: A modest $2 per tonne per month.

Combined, these costs reach $62 per tonne per month. Over three months, the total reaches $186, significantly higher than aluminium’s equivalent.

What This Means for Contango:
The key takeaway is that neither aluminium nor copper markets currently reflect such high theoretical contango levels. Factors like market demand, supply dynamics, and speculative activity often lead to lower observed contango than theoretical calculations suggest.

Stay tuned as we dive deeper into these market mechanics and continue to demystify the construction and behavior of contango in upcoming discussions!