What the Great Commodities Sell-Off Means for Metal Prices

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Investors were treated to another wild swing in the commodities market last week.

A range of commodity prices collapsed last week after seeing unprecedented peaks lately the likes of copper, gold, cotton and oil all suffered. In fact, these commodities fell victim to the largest sell-off since the height of the financial collapse in September 2008. Investors closed out positions worth $30 billion on 18 main futures markets, according to Reuters data.

Source: Reuters Metals Insider, Nov. 22

“Many viewed the collapse in prices as a healthy correction for markets that had recently set multi-year or record highs, wrote Lisa Shumaker in a recent Reuters article.

In Shumaker’s analysis, she goes on to emphasize that a big part of the futures sell-offs is due to change in ownership rather than simply speculative investors liquidating their funds. Even so, primarily macro factors a stronger dollar, caused by euro zone debt worries, and fears that China will cut imports with a tighter monetary policy drove the sell-off.

Although oil, cotton and sugar have gotten much attention, how does the sell-off affect metals markets?

Simply put, not all is lost, necessarily. Here are some things we can look forward to as the end of Q4 nears and 2011 looms on the horizon:

  • Domestic aluminum news still looks to be strong, even though China is looking to cool its growth. In the short term, three-month aluminum prices have taken a hit, closing down 6.6% last week at $2,242 per metric ton. However, with supply tightness in the US, aluminum premium prices in the Midwest, for example, have remained higher than usual. Still, many analysts, including Harbor Intelligence, think it a good time to buy aluminum due to the recent bottoming out of prices. In the long term, Alcoa’s Klaus Kleinfeld takes a rosy view, as originally reported by the FT, predicting rising aluminum prices over the next ten years.
  • While we’ve read reports of how China’s import cuts have most recently caused copper prices to slide (in addition to Collahuasi workers accepting a wage offer to end the strike there), fund managers such as Stephen M. Land at Franklin Templeton investments, remain bullish on copper’s long term. On the heels of Chile’s Codelco, the world’s No. 1 copper producer, approving $2.2 billion for construction of a new open-pit mine to open in 2013, Land expects copper prices to rise by $3,000 to $4,000 per metric ton over the next few years, according to a Reuters report. He also expects platinum and palladium to rise, among other commodities.

Overall, it will be crucial to keep an eye on how tightly warehouse supply correlates with prices in the next few weeks. Physical stocks may play a key role as China forces a cool-down of its demand, and as domestic producers remain wary of over-saturation in the marketplace.

–Taras Berezowsky

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