Commodities Comment : Dollar up, metal prices down?

The US dollar has rallied strongly so far in 3Q and US economicoutperformance suggests further upside. As expected this is putting pressureon dollar metal prices, but we note the dollar is one of only many factorsdriving metal prices, the impact is lessened the more producers andconsumers use the dollar or linked currencies, and there is no obviousnegative relationship between the dollar and metal prices in other currencies.

    Latest newsBase metal prices rallied strongly before the London close after news reportssuggested the PBoC had injected 500bn yuan ($81.4bn) into leading banks.

    Chinese domestic ex-work alumina price reached RMB2,724/t on Monday, up9.4% from the August average price of RMB2,489/t. CFR China alumina pricehas also moved higher to $356.3/t, an increase of 5.5% from the previousmonth’s average price. This has opened the import arbitrage significantly. Inour view, the rise of domestic alumina price is driven by the rising aluminiumprice as well as ongoing recent market tightness. The Chinese domesticalumina market has been tighter as more new smelting capacities have comeonline since August and the resumption of previously idled capacities increasedemand for alumina. While there have been delays in new refining projects,there is increased demand chasing limited production. Furthermore, smeltershave started to re-stock materials ahead of winter.

    Japanese aluminium stocks at main Japanese ports rose 8.5% MoM inAugust. Inventories totalled 369,571t at Yokohama, Nagoya, Osaka, Fukuiand Nagoya. It was the highest port inventory level since February2009. Nagoya stocks rose 15.4% MoM and 20% YoY to 157,500t. Whileproducers are trying to settle the 4Q premium at a higher level withJapanese aluminium buyers. It is reported that the Japanese market is wellstocked with supply under long-term contracts and the market is not tight.

    At the end of last week, the world’s largest listed uranium producer, Cameco,announced that a tentative agreement has been reached with strikingemployees at its McArthur River mine and Key Lake mill. Voting on theagreement by workers should be completed by early October but preparationsare already underway for workers to return to sites and resume production.

    We had highlighted that a prolonged disruption would be significant for S/Dfundamentals, since McArthur River accounts for 13% of global mine output.

    Instead a tentative resolution has been reached after just two weeks of action.

    LME COTR data released on Tuesday revealed a discordant relationshipbetween Money Manager (MM) net length and prices, as during last week’ssell-off it seems that many of the money managers were liquidating positionson both sides. This meant for most metals the price fall eclipsed the reductionin the MM net long, and appears driven more by Broker Dealer/Index Trader(BDIT) activity. Copper MM net length was up 2.2kt contracts and total openinterest (OI) was up 8.6kt lots WoW. Aluminium MM net length decreased by4.6kt, with longs down by 9.5kt offset by 4.9kt fewer shorts. Total OI declinedby 10.7kt. In zinc there was more direction, as MM longs fell by 8.7kt lotswhile shorts were up 3.55kt, leaving net length down 12.3kt. Total OI wasactually up 10.9kt, however, as those in the BDIT and producer categoriesincreased positions. Meanwhile for nickel, MM net length was down 2.5kt withlongs down 0.7kt and shorts up 1.76kt. Total OI was up 11.6kt.