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What’s Going on in the Metals Markets?


Last week an analyst with JPMorgan Chase (JPM) rated Alcoa (AA) as “overweight” and raised the target price on the aluminum company’s stock from $22/share to $25/share. The same analyst raised his EPS estimate for 2010 from $1.15/share to $1.45/share. The Thomson Reuters average 2010 EPS estimate is $0.56/share. Quite a difference.

The JPMorgan estimate is based on stronger demand and higher prices in 2010 for most metals. The demand estimate is based on economic growth in China and, to some extent, the rest of the world. Production is expected to rise, and along with it demand for iron ore, coal, aluminum and other base metals.

However, there might be an alternative explanation. When the U.S. Labor Department released its recent unemployment report showing that unemployment had fallen more than expected, commodity prices, including metals, fell. Shouldn’t traders have been more optimistic about global economic growth than that?

Perhaps traders were worried about inflation? But falling prices for crude oil and gold argue against that interpretation — at least for now.

About all that’s left is U.S. monetary policy. Here’s how the story goes: if U.S. employment recovers, the Federal Reserve will start to raise interest rates. As that happens, investors will pull out of the commodities market, which is where they are now putting cash borrowed at less than 1% interest. Very shortly after interest rates begin to rise, commodity prices could drop dramatically. If, as some suspect, commodities have recently become an investment class, investors will head for the exits the moment they can get more for their money somewhere else.

In aluminum, for example, China is the world’s largest producer and user of aluminum. The country’s stockpiles are near capacity and short-term purchases of aluminum are unlikely. Chinese copper and nickel purchases are also down.

There are reports that ArcelorMittal (MT), the world’s largest steel maker, could cut 10,000 jobs in 2010 in an effort to boost productivity and reduce expenses. That follows job cuts totalling 36,000 in 2009.

More than ever before, commodity prices, including metals, could be indicators of inflation sentiment. If commodity prices start to fall, then inflation fears could well be the culprit. And if the Fed raises interest rates, the fall could be fast and far.

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