RecommendationOur advice since March and since summer of securing extra supply was sound. But despite the price increase we have continually said that we should be cautious and avoid medium and long term fixed price contracts because the major trend is still pointing downwards. With the currrent move below the short term moving average we should be extra careful, and wait to see if the break is going to be objective. Fundamental analysisWorld production of aluminium has increased at a steady pace of around 3% per year in recent years. Production increased by over 3% in 2008, and the forecast for production in 2009 is an increase of just 0.4%. However production has declined by remarkable 25% in the first half of 2009 compared to the same period in 2008 and the forecasted small increase could turn out to be a substantial decline instead. This should be seen as a response to the reduced demand from major sectors due to the continued economic downturn and the current historical high inventories. Demand for aluminium has been very high in recent years, but this has now changed. Especially the major demand sectors (Construction, automobile, domestic appliances and beverage cans and food containers) have and are reducing their activity, thus demand for input materials - aluminium included. This will reduce the normal demand increase and the forecast for 2009 is a heavy 12% decline in world demand. The combination of very high and increasing inventories together with decreasing demand will continue to provide a downward pressure on prices in 2009 - and we have seen prices dropping 40% since the spike in June 2008. The cost aspect of aluminium has shown very high earnings for the industry - but this situation recently changed for the worse and the industry's earnings were under pressure. However due to a recent 40% aluminium price increase, the industry's earnings are currently quite average, but costs of production are still downtrending which should provide a downward pressure on the aluminium prices. | Technical analysisRight now we are seeing the price breaking below the short term moving average. This break is, however, not valid yet. We need the RSI in the small graph to go below 40 before the break is valid. But at least we are seeing some of the price weakness that we have warned about. So right now the short term moving average is changed to yellow. We can still change it back to red rather quickly, and we need the objective confirmation before we change it to green. This may or may not happen right now, but eventually it is just a matter of time before the arrow is green and we start a new downtrend. During the last few weeks we have said that the price should be about to reach the peak soon, and that we should be cautious. And we are now seeing that prices is trying to move below the short term moving average. So basically we have reached the price target we mentioned in July: The rough price target we gave was 1900 USD, with 2150 USD as a less probable target. It turned out to be the 2150 USD that was the realistic one, as we almost reached this. We have to understand that the whole increase from March is not fundamentally justified as the inventories keep increasing to new extremes every month. But this is the nature of short term corrections. So right now the short term arrow is yellow, but on the medium and long term we should be ready for a renewed downtrend and in the big picture we should be much more concerned with the downtrend that will follow after this temporary increase is over. The overall downtrend will continue and - after the current increase is over - the next price target is 1100 USD. Business Cycle analysisSince 2006 our model of leading indicators have predicted a downturn in the general economy that should start at the beginning of 2008. Indeed, during all of 2008 we have seen a gradual decline of the economy, but we are still in the early phase of the general downturn. The financial crisis has turned into a recession, and we will continue even lower. As the leading indicators haven't started to increase yet, we are looking at a minimum of four to seven quarters of continuously declining macro economy. This means that all of 2009 and the major part of 2010 will be in decline, and possibly further than that. This macro economical downturn will affect aluminium prices very much. So we are looking at a correlation where the falling economy and failing demand will put a continuous downward pressure on the aluminium prices during 2009 and 2010. |