Market Prices
April 2006
This article discusses the drivers of the metal prices in the market. The update date is above. For up to date metal prices view our aluminium and copper price graphs.
Into 2006 the commodity prices have stayed achingly high and new highs have been pushed by most metals. In 2006 alone aluminium has increased in price by 14% though it has only recently found its legs again. Talk has turned away from perplexity at the mismatch between fundamentals and metal price and has moved to discuss a super-cycle for commodities. With copper having increased by over 35% during 2006 aluminium has progressed to greater heights. If aluminium performs as copper has in recent months then the prospect of $3000/ ton is a possibility. Late April has seen historic high prices be pushed yet further with Copper breaching the $7000/ton mark and Aluminium edging close to $2800/ton. If the rally seen through 2005/ 2006 continues then it is likely that funds with long positions will continue to show interest and other players will attempt to make hay while the sun is shining. It may only be when there is overwhelming evidence that the market has topped that the counter move will happen. Howver, the market has looked as if it had topped during this year yet the short selling kept the heat in the money.
1 Mismatch between Demand and Supply
Demand from the East has been a primary driver of the increased price of aluminium and copper. Indeed China is the biggest user of copper. However, gains in China and India, (both for demand and stock piling) have to be offset against rather modest demand from the west. A short term spike in demand and corresponding draw down of supply as production gears up in advance of a summer slowdown may well be fuel to the fire and will help prices to remain high.
The price would not have been driven so high had their not been supply side issues for both metals. Inventory levels for many commodities are at an all time low and this adds to the difficulty quotient of calling prices. For aluminium, the supply side has been unable to respond to the increase in demand and heavy hand tactics in 2006 will add further pressure to the situation. The primary material, (Alumina derived from Bauxite) will be in short supply and will do nothing to ease prices. The year on year trend for aluminium stocks on the LME is down 7% on 2004. For copper, stockpiles are low and mine closures have acted like a buffer. Those stockpiles that are tracked by the LME have on occasions had less than 4 days global demand available. In addition to the discussion about fundamentals the historical reaction to high spot prices, (reducing local supply in the expectation of falls), has not had the expected result of increasing market supply and thus dampening prices. Indeed some suggest that these warped prices can even be justified!
Outlook: Demand will stay strong and supply will be slow to adjust therefore price could remain relatively high. Supply difficulties caused by industrial unrest will add price pressure. Some current counter intuitive statements suggest that some commentators think that supply and demand fundamentals are becoming more closely alligned even at these high price levels and that the growth in the global economy will support the current high metal prices. Such statements suggest that the cycle has legs and that the view that a sharp correction is due may be misleading.
2 Energy Costs
The mining and alloying process which is extremely energy intensive has been affected by the higher cost of energy that is affecting us all. Suppliers are often not making the high margins that could be expected during these high price times. Higher input costs act to restrict margins and can reduce supply if some leave the market. If supply is reduced the price will rise!
Outlook: Energy costs may abate slightly but possibly not to pre 2005 levels.
3 Non-Fundamentals
During 2005 commodities outperformed equities and bonds on some markets. This performance, as well as a general need for many funds to diversify, has encouraged an inflow of money to commodities from hedge funds and pension funds. During 2005, the Goldman Sachs Commodity Index rose greatly in excess of the 18% achieved by the FTSE 100 share index.
During 2005 and certainly into 2006 there will remain a strong undercurrent of fund interest which will drive the market on money rather than fundamentals. This has been the case for the first three months of 2006. Indeed much of the commodity talk of late has been of when funds buy and when they take profit and of the impact in the market that results. The prevailing market sentiment seems to have been to avoid standing in the way of the bulls that sometimes seem act as if they would buy at any price! Copper had led the field in 2005 but there are signs that funds seeking to spread risk are to rotate into Aluminium, Lead and Zinc. During 2006 copper has been extremely volatile though other metals such as Nickel have sparked interest too. The strong performance of some of the major equity markets might prompt a degree or two of investment rotation away from commodities that may remove of the heat.
Outlook: As long as commodities perform well, interest from non users will cause price pressure. 2006 is bearing out this view.
Reviewing the previous year and 2006 to date suggests that the market for metals is in some sort of a super cycle. This is a speculative bubble with enough self fulfilling prophecies built in to suggest that prices will remain strong in the immediate future. It is becoming ever harder to call the markets and the real question regards the position of the cycle peak. Traditional forecasting methodologies are even becoming less appropriate to calling the future price and this might be contributing to the strength of the super cycle. The rounds of grow, consolidate and then grow some more, in the absence of a major shock, looks likely to be with us for a while.
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