Base metal markets across LME are showing signs of surplus

Spot prices for the six key metals that dominate trading on the LME are all at a discount to futures, with spreads for copper hovering near the widest on record. The market structure, known as contango, typically indicates there’s enough supply to meet near-term demand.

While metal-market contangos are not unusual, their depth and persistence is a troubling signal recalling the years of sluggish growth that followed the financial crisis. In 2023, tighter monetary policy has hit manufacturers and construction firms across the globe, while China’s uneven rebound from the pandemic has weighed on demand in the world’s top metals consumer.

Base metals prices pulled back across the board on Wednesday as the dollar strengthened, trimming gains made in November as traders priced out further US rate hikes. A stronger greenback makes commodities more expensive for buyers in other currencies.

Sluggish metal demand has allowed stockpiles held by the LME to recover from historically low levels as traders deliver surplus products to the exchange. It’s also spurred major players like Citigroup Inc. to enter massive metal-financing trades: buying metal cheaply and selling it forward for profit.

To be sure, the switch to contango is partly driven by higher interest rates, which adds to the cost of borrowing the funds needed to buy and hold metal for longer periods. That pushes those selling futures to demand a higher premium for metal deliverable at a later date.

In copper — which is often bought as a proxy for growth — the discount for spot metal relative to three-month futures recently touched the lowest since 2009 as a percentage of the price. At a major industry event in Shanghai last week, sentiment for 2024 was mixed, with many market players expecting a growing surplus of refined metal even as output from mines is under pressure.

Still, the metal has benefited in recent days from expectations the Federal Reserve will cut interest rates next year, as well as robust demand from China’s renewable industry. Stockpiles in Asia’s largest economy have depleted to critically low levels this year, a sign of local market tightness that could pull copper onshore.

“Contango is usually seen as a negative signal, as it indicates there is ample spot market supply around, and incentivizes putting the commodity into storage,” Morgan Stanley analysts including Amy Gower wrote in a note. But for copper “since 2003, a strong contango has not been a negative signal for prices, likely as China has been there to absorb excess material.”

Copper futures on the LME fell 1.1% to $8,355 a ton by 2:55 p.m. in London. All major metals were lower. Aluminum slid 1.3% and zinc fell 1.9%.