Glencore International, the world's biggest commodity trader, and Credit Suisse are in advanced discussion about creating the world's first physically backed aluminum exchange traded fund (ETF), four industry sources across Asia said on Thursday.
While they say a launch is not yet imminent, interest in physically backed commodity products is widely expected to grow as tougher U.S. regulation on futures contracts threatens to shift investment flows toward exchange-listed physical ETFs.
"The first tranche of the financial product would be worth $1.5-$2-billion," a senior official with a trading and investment firm that does business with Glencore told Reuters, saying a Glencore executive had told him of the plan.
When asked about the ETF, a Glencore spokesman referred all questions to Credit Suisse. A Credit Suisse spokesperson was not immediately able to offer any comment.
Such a fund could allow Glencore, which has a strategic derivatives trading alliance with Credit Suisse and has already launched an active-trade commodity index fund with the investment bank, to gradually release some of the over 1 million tonnes of physical aluminum it is believed to have amassed this year.
The fund would also join a growing global suite of financial products that are enabling institutional and retail investors to tap into the commodities boom.
Although discussions have been ongoing throughout the year, the two must still overcome key obstacles before moving ahead, including convincing an established ETF provider that investor appetite is strong enough to offset the rising cost of storage and financing, as well as logistical complexities.
"There are a lot more complications - such as the physical premium, cost of storage - than with precious metal ETFs," said one source. "But aluminum is the obvious one to do of the base metals, it's got a supply overhang, relatively cheaper storage."
It was not immediately clear how or where Glencore would list the ETF, suggesting that the product would still need to pass regulatory muster on a securities exchange, a process that can be prolonged based on previous precious metal ETFs.
One trade source said such an ETF could be announced as soon as the London Metals Exchange (LME) Week event next month, but a second source said a launch this year appeared highly unlikely.
While other base metals ETFs have been traded for some time, they are typically backed by the issuer - which will offset the investment on exchanges rather than buy the actual resource - whereas a physically-backed ETF requires the operator to purchase and stockpile the commodity as investors buy the fund.
Canada's ScotiaMocatta last month unveiled the world's first physically backed copper fund.
The dollar sums suggest that Glencore may be committing to sell via the ETF some or all of the 800,000 tonnes of aluminum it was reported in June to have purchased from heavily indebted UC RUSAL, the world's largest aluminum producer, in which a Glencore subsidiary owns a 9.7 per cent stake..
This week fresh talk emerged of a deal to buy another 500,000 tonnes of the metal, to total 1.3 million tonnes or around 3.5 per cent of world production. Both Glencore and RUSAL declined to comment on any sales.
Precious metals-backed exchange-traded funds have a huge influence in their underlying markets. The SPDR Gold Trust , the world's largest gold-backed security, holds around 1086.5 tonnes of gold, and ranks as the world's sixth biggest holder of gold.