Hey! What happened to my commodities boom? Didn't Jim Rogers promise me wealth beyond the dreams of avarice, if only I believed? Well, no, actually he didn't, and if you've been paying attention, you may notice that he doesn't like everything all at once - lately, he's been focused on shorting the U.S. financial market, and buying airlines and agriculture, with a side order of continued bullishness on oil. He's quick to point to base metals when someone accuses the commodities markets of being in a bubble, and as recently as May, said he wasn't a buyer.

So what the heck is going on? What could be so bad in the base metals market that even Jim Rogers is looking to airline stocks, and what we have to assume was his most profitable trade in decades: shorting financials.

More than any other niche in commodities, the last six months in base metals have been a story of Chinese demand. Let's start with copper.

Copper

Copper had a great run - if you managed to be long on New Year's Eve. The dollar's seemingly endless decline boosted the price of anything priced in dollars (not just copper), and those already-rising prices were kept in the headlines because of labor problems: Strikes in April kept traders focused on supply coming out of Chile, which is responsible for a large portion of worldwide copper supply. Countering that (and thus, perhaps, trapping copper in its trading range) was increasing evidence that the copper-supply crisis is over. The International Copper Study Group released just this month says that 2008 should have surplus of 34,000 tonnes. And there are indications that the supply/demand imbalance in China in particular is stabilizing: China imported 24% less copper in June 2008 vs. June 2007, despite the elimination of some of the export taxes that had been keeping production in-country as much as possible.

Confused? Copper is in a state of flux. Worldwide demand seems to actually be temporarily slowing down, but then, mine utilization has dropped as well, due to labor and operational problems. The supply issues are likely transient - labor disputes eventually resolve, equipment gets fixed. The supply issues are far more troubling (if you're long copper, not if you're a plumber). Most of the smart money seems to think that the big news is behind us, and thus copper will trade based on news and fundamentals, with a default toward stagnation. These are the recurring themes of base metals in the first half of 2008 - a fast and furious rally at the beginning of the year driven by a weak dollar, followed by a return to fundamental supply-and-demand issues.

Aluminum

The fortunes of aluminum are tied to energy, and forever more shall be. One-third of the cost of aluminum is energy, and although that's quite often electrical, not crude, crude drives the energy bus, and aluminum tends to follow.

From the demand side, aluminum looks much like copper. Evidence so far is that China - while still importing - is importing much less than it did in 2007. This is largely by governmental design - the Chinese government levied a 15% tax on any aluminum exports in an effort to keep production in-country, and it's been working. The downside of this has been stagnated pricing worldwide in the second half of the year, and there's evidence that, like copper, the Chinese part of the equation has come into balance, with Chinese domestic aluminum foundries either laying low (in part due to big energy problems trickling down from coal mines), or halting expansions.

So what could create another aluminum rally? More energy problems or continued disruption in the Chinese domestic supply situation. To the extent we see continued electricity problems elsewhere, like Africa (a large producer), or global disruptions in oil supplies that drive energy prices writ large upward (for example, Israel bombing Iran), you could see an indirect rise in aluminum.

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