According to a report from the Wall Street Journal,''it can be all too easy to dismiss conflict in a place like South Sudan as "a quarrel in a faraway country between people of whom we know nothing," as then-U.K. Prime Minister Neville Chamberlain said of Czechoslovakia in 1938".
Anyone dabbling in commodities should know that nowhere is that far away, and all sorts of unexpected linkages exist. When it comes to the impact of South Sudan's crisis, consider oil and aluminum.
Next year is shaping up to be bearish for oil prices as supply growth outpaces that of demand. But recent years have reminded the world that much oil gets produced in volatile places. Civil conflict in South Sudan puts at risk its output of about 250,000 barrels a day.
Which is not an important amount as % of total world production, but if it coincided with, say, worse violence in Iraq or a breakdown in talks with Iran, it could help support oil prices.
Higher oil, and so energy, costs could help aluminum producers and their investors with a chronic problem: oversupply. Morgan Stanley estimates that since 2007, the market has accumulated 11.59 million metric tons of surplus metal. That is equivalent to roughly three months of global demand, a huge overhang.
Despite healthy demand growth, the world's smelting capacity has increased too rapidly to lift prices. Promised closures rarely seem to materialize. As of mid-November, some 1.2 million metric tons of production cuts had been announced, according to Citigroup. Yet the world produced an extra 1.8 million metric tons through the first 11 months of 2013 compared with a year earlier.
Morgan Stanley estimates the highest-cost aluminum producers make the metal for north of $1 a pound. The market price today is less than 80 cents. A big reason many smelters keep running despite this: Half the world's aluminum comes from China, where economic concerns aren't always the primary driver of keeping a facility open. Rising energy prices would squeeze high-cost producers further.
Taking in account all these facts, at the end of the day fundamentals will prevail, and because of the high stocks of aluminum, expect oversupply in this metal and weak prices also.
