Base metals – Relative value
Aluminium strength should continue
Aluminium has lagged its base metal peers through most of this year due to rising inventory levels and an overhang of mothballed capacity. However, it has been the best-performing base metal in the past month and this outperformance will probably continue for the time being. There are several key reasons for this bullish view. First, it is most heavily used in the automotive sector, a sector which has rebounded strongly in recent months as government stimulus packages in a number of countries target this market. China has been at the forefront of this and is likely to become the largest auto market this year. Second, aluminium prices are gaining strong support from the cost structure of the industry, a factor
which is likely to rise as the USD weakens. Third, estimate that around 75% of LME
aluminium inventory is currently tied up in financing deals. This will help to support a shortterm spike in aluminium prices.
Copper looks more vulnerable
While copper’s underlying fundamentals look strong from a medium-term perspective, prices are vulnerable to a significant pullback in the next few weeks. Prices have rebounded strongly in recent months on the back of rising confidence about the global economic outlook, production problems in Chile, and very strong imports by China. These last two factors should be less supportive in the weeks ahead. First, we are looking for full production to resume at the Escondida mine in Chile – the world’s largest copper mine. The current maintenance shutdown will come to an end by the end of August. Second, we are looking for a pullback in China’s imports. These soared in June due to strong demand and stockpiling activity by speculators and the government. During July and August many
consumers will close for maintenance and high prices are expected to discourage further stockpiling.
Production costs should help differentiate the two
The conditions that pushed base metals prices higher in Q2 will probably be weaker in Q3; record Chinese imports are not expected to continue and it seems unlikely that global markets will reprice global growth expectations even higher. Subsequently, with overall base metal market risks biased to the downside, cost pressure support levels should offer a way of differentiating the metals.
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