Deteriorating market fundamentals in October justified the negative investor outlook. Demand weakened, evidenced by another decline in Net New Orders for Mill Products in October.

At the same time, IAI production for October posted its largest monthly volume for 2011. Although IAI producer inventories were at their lowest levels for 2011 in October, there is still more than 4.5Mt of primary aluminum in LME warehouses.

When prices reached $2000/t, we did not believe these levels would be sustainable for long, and recent upward price movements have confirmed this belief.

Prices quickly gained nearly $200/t on November 30 and December 1, as better economic news coming out of the US, paired with the commitment of major central banks to ensure liquidity in the Eurozone, bolstered sentiment (for the time being).

We mentioned back in October that if short-selling was taking place and facilitating the price drop at the time, these positions would need to be bought back at some point.

We believe that is what is happening now - short-term investors are reducing short-positions, thereby helping prices move higher. In addition, there is some conjecture that China could be in the market to import aluminium with prices hitting $2000/t, so this could also be adding fuel to the fire.

Although US economic data has been positive lately, until we see clear evidence of improvement in the fundamentals on a global level, as well as the return of financial stability in Europe, a sustained rally could prove to be elusive.

Mike Southwood, Senior Consultant, CRU Price Risk Management