Modelling Market Fundamentals: A Model of the Aluminium Market

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Abstract
The standard approach to modelling primary commodity markets under rational expectations is to relate the commodity price to the production and consumption `surprises' (i.e. the innovations on the equations). Using the world aluminium market, I show how this approach can be modified so that both the price and stock can be written in terms of one or more market `fundamentals' which reflect the supply-demand balance on the market. This approach allows joint estimation of production, consumption, stock demand and price equations subject to cross equation restrictions. It may be seen as a formalization of the approach adopted by metals industry analysts.
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