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November 4, 2009 Dear Friend,
There are increasing
evidences that various commodities markets are bottoming out,
restocking or improving. It is more difficult for us to find
companies whose fundamental positions are worsening to support
Underweight, sell or short positions. We regard aluminum,
steel and wood as "oversupplied" commodities in which we looked
for "Underweight" situtations, but we have been reversing many
of those. We raised MeadWestvaco to Neutral from Underweight
and U.S. Steel to Overweight from Neutral in the past week.
In effect, the gradual
rebound in the U.S. manufacturing economy, rapid growth in Asia
and some supply casualties owing to new project cancellations or
production misses are tightening even some weaker markets.
We raised Louisiana-Pacific
to Neutral from Underweight because it almost met our $5 price
objective and it surprised to the upside with a slight positive
EBITDA in the third-quarter. While we regard those margins as a
seasonal peak benefiting from unusual low natural gas or fiber
costs, cash outflows are much smaller.
We raised Century Aluminum
for Neutral from Underweight due to higher aluminum prices, a
debt-equity swap and initial plans to fund the first 25% phase
of its Helguvik 360,000 smelter greenfield project in Iceland.
Century Aluminum has issued equity twice in 2009, but appears
weathering the crisis without losing any of its capacity thus
far. The "pot of gold" in the 2015-16 horizon involves
potential $2 per share earnings in 2016 after the 360,000 tonne,
$1.8 billion new project operates.
We changed our long-term
aluminum price forecast to $0.90 for 2010-11 and $1.00 per
lb for 2012 onwards, despite oversupply of idle capacity and
inventory, due to financial factors. This is not a strong or
"foolproof" argument, and we could be criticized as following a
"greater fool" or herd mentality.
Aluminum prices trade in
sympathy to spot crude oil prices as an indicator of the
direction of future energy costs, however inexact, and crude oil
broke $80. Zinc and lead prices exceed aluminum by a wide
margin, and copper and nickel have risen. The weak dollar and
low interest rates benefit aluminum prices too.
Aluminum inventories have
stopped rising, and apparent consumption rebounded by 0.7 mmt
per month since the first-quarter of 2009 as well. We do not
argue for an aluminum shortage in 2010 or 2011, but surpluses
are not growing any more.
John C. Tumazos
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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