We thought it may be of interest to try and make sense of the current market situation and review some of the principal base metals during this week as we pause before year end to look at what 2009 may bring.
So for a kick off we will start with aluminum. LME inventories stand just shy of 1.8m metric tons and with prices not seen since the 2nd quarter of 2005. Demand has dropped off from just about every sector but autos has probably hit aluminum the hardest. The announcements of smelter production cut backs has barely had any impact on the price nor will they until inventory levels fall.
As power costs and bauxite prices have come down, producers are under less cost pressure than they were but less is relative; this merely means the lowest cost producers are not losing money, the higher cost (such as many Chinese mills) are still in the red at these levels.
In the absence of any supply/demand fundamentals to guide the market, prices have tracked to the dollar. As the dollar has strengthened, the aluminum price has come down. If the dollar were to weaken, we could expect some upward movement in the aluminium price but that appears unlikely in the short term. Even with all the dollar’s problems, it is the best of a bad bunch as far as international investors are concerned and has been heavily bought. As a result, exchange rates have risen and aluminum has fallen.
The planned infrastructure and fiscal stimulus’ announced in the USA, Europe and China will have only a marginal impact on aluminum. Unlike copper, aluminum is more influenced by the housing, consumer goods and automotive markets, which will only come back as consumer confidence returns in 2010. However we do see prices increasing from current levels, certainly by Q2 2009. Eventually the cut backs will begin to have an impact on inventory levels and the supply chain will begin to re-stock as a degree of calm returns to the economy.
In the mean time, prices could drop further if the dollar resumes it’s upward trend. For the time being, the aluminum price is driven by world economic news and currency trends rather than the demands of the market.