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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Paper provided by European Science Foundation Network in Financial Markets, c/o C.E.P.R, 53--56 Great Sutton Street, London EC1V 0DG in its series CEPR Financial Markets Paper with number
0030.