5/18/16

Copper price may fall deeper and aluminum is close to the bottom


Since 2008, we have been reporting that the evolution of various components of CPI and PPI in the United States is not a random process but rather a predetermined one with long-term sustainable trends [1, 2]. Using these trends, one can predict consumer and producer price indices for various goods, services, and commodities.  For example, in [3, 4], we presented the evolution for many goods and services with varying weights in the CPI. There are more goods, services, and commodities of interest for producers, consumers, and investors, however. Here we revisit and report the success of our predictions for the index for copper ores (the previous revision was two years ago). This is an example showing that some commodity prices are well predictable.
Figure 1 displays the difference between PPI and the index for copper ores since 1988. This difference has a remarkable history: no big change between 1988 and 2003, and then a sudden surge in the copper index started. The peak was reached in the middle of 2006. It survived before the second quarter of 2008. Then the copper index dropped by almost 300 units back to the overall PPI level. In 2009, the PPI of copper increased above 500.  Since 2012, the price index of copper has been falling along a linear trend. One may consider these changes as associated with the rise-fall cycles in oil price, but there is no one-to-one correspondence.
We have to admit that there are no sustainable trends in the copper index and the future of the copper ores index cannot be predicted at a ten-year horizon. Since 2012, the difference is on its way to the zero level. Soon it may reach the trough observed in 2009 (see Figure 2 for relative or normalized prices). Two years ago, we formulated our prediction in a form that there was “no sign that the PPI of copper is going to change its long-term decline. And this was a correct forecast – the copper price still follows negative trend. If the pivot point for the current trend in the difference between copper PPI and the overall PPI is around 0 then the copper price will be falling another two years. This is in line with our prediction of further decrease in energy prices in our previous post.


Figure 1. Evolution of the price index of copper ores relative to the PPI.


Figure 2. Evolution of the difference between the overall PPI and the price index of copper ores normalized  to the PPI.

Aluminium price had a short-term excursions into higher figures in 2014 and quickly returned to  ite negative trend in 2015. This was a dramatic fluctuation, but not the biggest one in the past 10 years as Figure 3 shows. In 2014, we expected the difference to follow the green line into 2016, and this fluctuation was a major deviation from the expected behavior. Aluminum is a commodity, which suddenly changed its behavior. Currently, the price of aluminum follows the green-line-negative linear trend. From historical perspective, however, there is no room for further fall in aluminum price as Figure 4 shiows. It might be the best time to consider investment strategy for the next 5 years.  


Figure 3. Evolution of the difference between the overall PPI and the price index of aluminum scrap.
  
  

Figure 4. Historical time series for the difference between aliminium and overall PPI. Aluminum price may soon reache the historical minimum. 

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