Why is Rusal issuing an aluminium ETF?

Why would a Russian aluminium producer be interested in launching an exchange-traded fund business?

SocGen analysts, for one, have been wondering.

The background here is that Rusal announced last week that it would provide further details of a possible physical ETF to be backed by 1m tonnes of metal in the second half of this year.

The move is intriguing since, as every aluminium market watcher knows, the world is currently awash with aluminium.

This is partly due to contango being present in the metal's price structure - when prices for delivery in the future are more expensive than for today. The phenomenon encourages the storage of commodities because it pays traders to buy now and hedge sales with long-dated futures.

SocGen analysts note that Rusal's is not the only aluminium ETF to have been announced recently. Last year, the partnership of Glencore and Credit Suisse said it would be launching a phsycial aluminium ETF in 2010.

That fund is expected to make its debut very shortly, and it's already being blamed for pushing aluminium prices higher. Says SocGen:

Indeed, LME 3 month prices reached $2,494/t in trading on April 16th, the highest level since September 2008. Glencore bought around 1.4 million tonnes of primary aluminium from Rusal during 2009, and it is this metal that is widely believed to form the physical backing for its ETF.

Despite that context,though,the analysts say Rusal's move still appears strange:

Does Rusal wish to significantly tighten the aluminium spot market （already impacted by the tying up of metal in financing deals） thereby dramatically raising premiums, or is it driven by a growing realisation that is simply going to have too much metal on its hands as Chinese import demand for aluminium continues to shrink. Rusal had targeted China as a key market for its metal.

In other words, they're wondering if Rusal is actually trying to monetize surplus inventories efficiently.

As they further note:

However, it is stock financing deals continue to act to artificial tightening the market, with still around 70-75% of LME warrants alleged to be tied up in financing, limiting physical availability and prompting rising premiums in some geographic markets. Duty unpaid premiums in Europe have risen sharply over the last week, reaching $75-95/t on Wednesday this week, compared to $60-85/t last week. The surge in premiums is said to be prompting warrant holders to break financing deals. Indeed, stocks in Rotterdam have fallen by nearly 45,000 tonnes since mid- February as premiums have picked up. In addition, the breaking of deals is likely to accelerate as the expectation of interest rate increases grows going forward, eating into the profitability of stock financing.

In Asia, where market oversupply is increasingly an issue given the China situation, and the ramping up of new Middle Eastern productions, ex-warehouse premiums are softening notably in Singapore as consumers are able to source material directly from producers rather than securing metal from LME warehouses.

Given that the issue of oversupply continues to overhang the aluminium market, and that financing deals are being broken currently because of strong premiums but expected to be increasingly interest rate related going forward, we believe that spot availability of metal will ease in the coming months. It appears when analysed that the RUSAL announcement of a physical ETF looks to be driven by the prospect of too much metal availability and falling Chinese import demand.

The key takeaway here then is that commodity producers seem increasingly keen on using exchange traded funds as financing vehicles.

Rusal's move is particularly poignant, though, since it comes just as the increased cost of stock-financing might begin to force other investors out of the storage trade too.

For Rusal, the stock financing problem is obviously not an issue.