Some Thoughts On Base Metals

The implications of China facing a hard landing should not be underestimated, particularly for commodities. China is the largest importer of base metals and the largest producer of Aluminium. Here I briefly discuss Copper and Aluminium.


Looking at the technical picture, Aluminium could hit US$1,600/tonne by xmas. If it fails to breach trendline resistance, then we could see it reach that level as shown by the chart.

Copper on the other hand, has broken through its short term resistance and is more or less trading sideways. Nevertheless, we believe that given the Global housing and construction bubble which is now bursting (from the US, UK, Europe, Dubai and China - to name a few). Demand for aluminium and copper will subside. Granted producers have already started cutting back output, but i do not believe that this will be sufficient to restore a balace in the short to medium term. Evidence of this exists at the LME warehouses which have seen a rapid build up of copper and aluminium inventories. As such we still see further downside ahead with a price target of US$1,500/tonne for aluminium and US$3,000/tonne for copper.

Having said that Reuters (not online) recently published a bullish view on steel for 2009. Im not sure what to make of it as I do not follow steel. Given that steel has only recently been listed (exchange traded) There is not as much info, but i will be looking into this going forward:

• China's steel demand seen rebounding from Q2 '09-CRU
  SINGAPORE, Nov 26 (Reuters) - China's steel demand is
  likely to bounce back from the second quarter of 2009 on a
  surge in domestic infrastructure spending, UK-based consultants
  CRU International said on Wednesday.
  By the end of next year, China, the world's biggest consumer
  of steel, could see demand rise 5-6 percent, said
  John Johnson, CRU's chief executive for China.
  "It's like a mirror image. If you can imagine 2008 started
  strong and end poorly, 2009 will start poorly but end better,"
  he told Reuters on the sidelines of a shipping seminar
  in Singapore.

Its not out of the question. As previously mentioned, commodities with low levels of inventories could bounce back quite rapidly should general economic activity or demand for a particular commodity pick up quickly. This, combined with a potentially weaker dollar next year would be supportive of higher prices.