Base Metals to Rally on Yuan Reform

China's move of making the Yuan more flexible will help the market react positively as hopes of an economic recovery have re-emerged. Therefore, a strong investor sentiment and higher risk appetite would support base metal prices this week.

Last week, base metal prices experienced losses as factory activity growth plunged, jobless claims increased and consumer prices in May registered their worst fall in almost one and a half years. Additionally, fresh selling by traders also dragged down the prices.

This week, metal prices would also be affected by the scheduled economic data releases. Existing home sales in May are foreseen to increase to 6.15 million from 5.77 million earlier, while new-home sales are seen declining to 410,000 from 504,000. Furthermore, U.S. initial jobless claims are seen falling by almost 12,000 in the upcoming week.

Dragged down by fears of a economic slowdown in Europe and a construction downturn in China, aluminum prices declined marginally by 0.05%, to close at $1,944 per tonne at the LME contracts for 3-month delivery. The LME 3-month forward aluminum prices remain at the last week support levels of $1,858 while resistance levels changed to $2,044.

During second-quarter 2010, aluminum prices have shed almost 20% due to high competition in the production market and instability in the raw material prices. Additionally, aluminum inventories on the LME declined by 22,550 tonnes to settle at 4.47 million tonnes.

Recently, it was revealed that Alcoa（AA） along with state controlled Saudi Arabian Mining Company have started working on a $10 billion, world's largest, fully integrated aluminum complex, which aims to be the world's lowest-cost supplier of primary aluminum, alumina and aluminum products.

Meanwhile, analysts say that the metal's prices have experienced enough fall to lead to significant production cuts in situations where higher costs for power in China have made it more expensive to produce aluminum.

Last week, most of the major aluminum producers followed the declining trend. Kaiser Aluminum（KALU） dropped 0.2%, while Alcoa was down 2.2%. Also, Aluminum Corporation of China（ACH） edged down marginally by 0.05%, while Alumina（AWC） gained 4.1%.