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A Critical Day Approaches for Commodities; A Look at Wheat, Aluminum, Copper (AA, FCX, POT)

Posted on | December 5, 2008 Time: 1:40 am |

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), I’m focusing in on wheat, aluminum, and copper.

Wheat

After forming a solid bottom around the $500 level for 6 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.

(click on wheat chart to enlarge...)

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 $.70/lb.

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.

More on this topic (What's this?)
Why I Love Commodities (Asset Prime, 2/17/10)
Wheat Prices Continue To Drop: ETFs and ETNs (Shocked Investor, 11/2/09)
Add Soft Wheat To Your Hard Asset List (Hard Assets Investor, 3/1/10)
Read more on Wheat at Wikinvest
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Category: Agriculture, Basic Materials, China, Metals, Mining, Secular Trends Portfolio
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