A Critical Day for Commodities: Wheat, Aluminum and Copper

In addition to the disappointing close in the U.S. equity markets yesterday, there was also a renewed breakdown in the prices of many commodities. Due to their leverage as catalysts to Potash Corp. (POT), Alcoa (AA), and Freeport-McMoRan (FCX), in this post I’m focusing in on wheat, aluminum, and copper.

Wheat

After forming a solid bottom around the $500 level for six weeks, wheat broke through big to the downside Thursday, with front month futures closing at $467.60. In conjunction with falling corn prices and a dour outlook from fertilizer producer Mosaic (MOS), the inability of wheat to hold has pushed Potash Corp. shares to new lows.

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Aluminum Blues

The price collapse in aluminum has been nearly unabated, with front month pricing down over 50% from the peak of over $1.40 this summer.

There are some rumors that China may step into the futures market in an effort to bid up prices for aluminum, and possibly copper or other base metals. China is really getting squeezed at its domestic smelters; if aluminum prices head much lower, the fallout could be severe, as many factories have already lost their margins at $0.70/lb.

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We also have the ongoing scepter of the auto industry’s woes, as Senate testimony yesterday only served to shout from the proverbial rooftops just how bad the industry is. We can dream about better solutions to the industry’s problems, but this Congress - and these CEOs - certainly aren’t going to execute on them.

All this has led to fears (or hopes, depending on your brand of whiskey) that Alcoa may join Freeport in suspending the common dividend. Alcoa has done well to improve the balance sheet in recent years, and lower input costs from cheaper fuel will soon start to offset some of the price declines. I reiterate my contention that sell-siders were foolish to keep “buy” calls up on this stock all through the fall, only to shout “sell” after shares had fallen 65%.

But where is the bottom on Alcoa shares? I’ve been notably humbled on my calls thus far, but can’t help noticing that if I extract all the goodwill ($5 billion) from the balance sheet, the market cap is still just 60% of book value.

Copper - Impervious to Infrastructure News

This base metal, once the poster child for the global housing boom, also broke through a prior low from November on Thursday, and now the metal sits on a precipice. If copper doesn’t stage a big rally today, there seems little to protect the price on the downside. Freeport-McMoRan’s news of copper cutbacks yesterday did nothing to prevent steep declines in the front month, and all the promising news of infrastructure stimulus from China & the U.S. seems to be months away from putting real dollars (and yuan) into real hands.

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Disclosure: None

Comments

[Vox Rationalis:]

The CU chart is astonishing. I wouldn't be surprised if it went below a dollar, though looking out at the end of this recession I'd be surprised if it didn't recover to something close to $3.

2008 Dec 05 09:19 AM

[Go Cards!:]

What about the soybean oil futures - any opinion as to where/when that will level out and start to recover?

2008 Dec 05 11:21 AM

[infp:]

Can someone please explain the tax consequences of capital gains on ETF's, versus ETN's and stocks? Thanks.

2008 Dec 05 04:48 PM

[Ryan Barnes:]

As to soybean oil, it's been doing worse than soybean meal, as apparently oilseed crop estimates have been coming in higher than expected. While soybean exports to China are up yoy thus far in the new marketing year (beginning Sept. 1), total exports are expected to drop as the year progresses.

2008 Dec 05 05:20 PM

[Pipo:]

Freeport McMoran CEO gave an interview explaning the situation of its industry.

Very good interview. He analyses the gold and copper markets.

ceotalk.blogspot.com/2...

2008 Dec 05 05:24 PM

[Urbane Gori...:]

India's largest steel smelter is proposing to reduce it's product by 40% in an effort to encourage mills to buy. IMHO, this will just cause another bout of price deflation in steel and resulting drop in steel companies and ore.

Who knows. Soon we may be buying brand new cars at $1000 a pop and filling them with 25 cent gas!

jegan

2008 Dec 05 06:53 PM

[Pipo:]

Biggest weekly drop in OIL since the Persian Gulf War in 1991.

Full Report on:

www.oiltradersblog.blo...

2008 Dec 05 06:57 PM

[Fighting Yoda:]

We are heading towards a major recession, the D word itself is being bandied about. Stay away from all commodities – these are falling swords – will chop your head, not just your fingers.

Overall market is going much lower, stay defensive, even shorting the market at very rip is still a good idea.

2008 Dec 06 03:45 PM

[nova:]

You can call it a conspiracy theory but suddenly commodities prices went to nothing at the time when all around world fiat-currencies printing just exploded.

Even, if one assume that the world will go to a terrible depression with overall world consumption drops by 20-30%, people still will need to eat, drive, work and use utilities.

The USA and EU are printing mountains of fiat-currencies to maintain their non-sustained standards of living. The Western societies are like drug-edicts, and by providing more low-priced and/or free drugs will not cure them or their society.

As commodities prices are going down well below the prices of producing them, two things will happen
- Commodities companies become so cheap that industries-wide consolidations/mergers will take places creating huge and eventually very non-productive monopolies
- Commodities production will drop enormously creating widespread shortages and huge price increases

Bottom Line
a) consumers, enjoy cheap commodity prices as long as they last
b) Commodities investor, prepare to enjoy huge rewards waiting for you just around a corner.

2008 Dec 06 07:53 PM

[Cole Bene':]

Copper is the key.

2008 Dec 07 12:52 AM

[NOWHEREMAN:]

Watch inventories at the LME, London Metals Exchange.
In January of 09, they were close to 100 tons, now copper inventories are close to 300 tons.

I expect that as mines shut down, the inventory will drop slowly but any big drawdown can only be attributed to buying in quantity from the Asian Big boys. This would be a good signal to buy the copper producers.

IMHO

2008 Dec 07 05:37 AM

[NOWHEREMAN:]

Oh, IPI, not mentioned above in the Ag commentary, Their last quarterly had a commentary by their CEO who believes that softness can occur for a limited time but expects sales to be robust in 2009 overall. IPI is a pure play Potash/Potassium fertilizers. IMO

2008 Dec 07 05:41 AM