Bank Of America & Morgan Stanley Comment On Commodities

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Aluminum production fell 15.6 percent YoY in July. The Aluminum Association said on August 8 that combined primary production from the U.S. and Canada fell 9.1 percent YoY. The U.S production fell 15.6 percent YoY and Canada fell 4.7 percent YoY. A drop in Aluminum prices may cause a firm like Alcoa to scale back equipment use and use lower cost reserves which may driving up margins as supplies are cut in an effort to balance the marketplace against strong Q2 performance.

Coal supplies continue to outpace demand in the face of a more fragmented suppliers market leaving BOA/ML forecasts for price increases fairly flat.  Benchmark Low-vol met PCI is expected to trade $105/mt by year-end 2014 and $107 by year-end 2015.  Coal production in the U.S YoY is down 0.3 percent and continued production slowdowns could continue to hurt firms like Peabody Energy which is down almost 19 percent YTD.

Iron Ore is seeing a slight rebound in China with demand improving and mills “restocking to 30-days at the end of July” according to BOA/ML Australia metals & mining analyst Duncan Simmonds.  Strength in Iron Ore is evident after BC Iron in West Australia made a $250M offer (10 cents in cash and 0.44 BC Iron shares for each IOH share) for rival Iron Ore Holdings.  The deal has conditions attached that (a) iron ore prices must remain above $90 a tonne for 20 straight days and (b) the S&P.ASX 200 must not close more than 10 percent below Monday’s level for five consecutive days.  Morgan Stanley expects FY2014/2015 prices to average between $90 and $100 per tonne.