Okay research analysts, hold your horses ¦let’s not get all hot and bothered over these commodity price increases. For the second time in a week, we take issue with the analysts and media talking up the commodity markets. The other day, we read copper demand had increased in China, causing prices to increase. We don’t agree.
And not 24 hours later we read that there is substance in the price rally from an aluminum report. Some of the comments from that report, which we won’t name, suggest that the price rally is underpinned by supply-demand developments, and in particular a bounce in daily demand from China. But we believe this statement makes no sense. We have seen increased buying, not increased demand. Most of the purchases, from the SRB (China’s State Reserve Bureau) basically move metal from one pile to another to replenish stock. No evidence suggests an increase in consumption.
The report goes on to explain another driver behind the aluminum price rally that relates to higher alumina prices. But let’s examine that point a little closer. Yes, the alumina market has now moved closer to a supply/demand balance, hence the prices have stopped falling. But, Rio, in the process of closing part of their Australian Weipa Bauxite facility and slowing expansion of their Yarwun alumina refinery suggests a different conclusion. Why would they do that if prices will increase and demand shows growth? At the same time, Rio does not see any improvement in alumina prices even after the industry had closed 12m tons of production since January!
Finally, the notion that SE Asia sees demand growth while the US no longer appears to shrink seems a bit premature. The author of the report suggests demand comes from other sectors (besides SRB stock-piling) such as automotive, construction, loan activity etc. But we have seen in China little to no upturn in retail sales or construction beyond state directed low cost housing projects and only a temporary increase in first quarter light truck and auto sales as a result of an artificial stimulus. Moreover, other economic indicators tell us power consumption and steel prices remain flat to down and the economy with its 5.8% growth rate suggests rising unemployment. In terms of the US economy, sure, the economy’s rate of contraction has slowed but to suggest that means prices will automatically move up seems rash. Prices could trade sideways for a long period of time, for example. We remain cautiously optimistic about the economy, however, as pockets of demand will appear as stimulus projects come into play.
Where will aluminum trade? Nobody knows for certain but $1300-$1600 represents where we feel the market will go between now and September.
–Lisa Reisman and Stuart Burns