Industrial metals such as aluminium, copper, lead, zinc, tin and nickel have been ripping higher over the past month, driven by a combination of optimism over the strength of the global economy, supply disruptions and an increase in speculative activity in commodity futures.
This chart from Capital Economics tells puts that into visual form.
It overlays the S&P GSCI Industrial Metals Price Index against long positions in industrial metals held by speculators.
The former is now at its highest level in close to three years, driven by a noticeable increase in speculative buying over the past few months.
However, while an increasing number of traders are now betting on further price gains, Simona Gambarini, economist at Capital Economics, suggests that the risk of a pullback in industrial metals prices is building.
“We think that speculative activity has played a major role in the move up in prices, as evidenced by the surge in the net-long position in metals futures over the past few months,” she says.
While Gambarini admits that most metals markets are now tighter than at the start of the year due to improved demand and temporary supply disruptions, she says that the combination of still-plentiful supply and lift in speculative long positioning raises the risk of profit-taking in the months ahead.
“There is no real shortage of industrial metals and, in most cases, disruptions are likely to have only a temporary effect on prices. What’s more, the extreme level of positioning in some markets –– notably copper, nickel and aluminium – means that there is an increasing risk of profit-taking,” she says.
“As such, we expect metals prices to fall back in the remainder of the year as investors realise that supply is plentiful and that demand growth might not be as strong as many appear to expect.”