Reuters reported that financing deals that have tied up most aluminum inventories in warehouses could unravel as the global economic crisis deepens and banks look to unlock funds,.

Mr William Adams an analyst at Basemetals said that "There is a potential for further problems on the banking side of things whether it's another banking crisis or a liquidity crisis. A lot of the banks involved in these financing deals, if they need money they might look around and say, there's a lot of money tied up in these financing deals, maybe we utilize some of that. That's something we need to keep in mind."

Total aluminum stocks in London Metal Exchange-approved warehouses hit a record high above 4.71 million tonnes in May and are currently around 4.6 million tonnes. Financing deals are said to have tied up about 70% of those stocks. In a typical deal, a bank buys nearby aluminum from a producer, sells it forward at a profit and strikes a warehouse deal to store it cheaply for an extended time period.

Mr Adams said that inventories and production were climbing with much of the production coming from China which currently produces 42% of world production up from 25% in 2005. Overall we think the market is in oversupply. Everybody thinks these financing deals will keep the market distorted, keep metal off the market. I think there's a little to much complacency.

Mr Steve Hardcastle head of client services at Sucden Financial said that "I think if we are going to see a crack in the volume of metals under financing arrangement it will be as a result of liquidity issues. But the important thing is that there are doubts being expressed about the continuing viability of the financing arrangements which in turn which may lead to prices easing."