Some intriguing gyrations are under way in the world of metal trading.
First, following a big dip in January, copper prices are on the rise again:
And so apparently are nickel, zinc and aluminium prices, according to notes from Barclays Capital, JP Morgan and Standard Chartered.
More intriguingly there has been a sudden surge in cancelled warrants at the London Metals Exchange (LME).
Metal on warrant represents inventories in store at the LME’s warehouse. But cancelled warrants represent metal earmarked for delivery — investors cancel their warrants because they want to take it out of the LME warehouse, as Chris Flood, one of the FT’s commodity correspondents, explained.
So a rise in cancelled warrants suggests more demand for the underlying physical commodity and deliveries thereof.
One more indicator of rising demand comes in the narrowing of a metal’s cash to three-month spread. And, as the following chart from BarCap makes clear, both of these scenarios are increasingly emerging in the market:
As the analysts themselves commented on Tuesday, shorts should probably beware:
… we believe there is growing evidence to suggest that non-China metals demand is recovering, albeit to varying degrees for each metal.
Furthermore, the arguments used to support bearish views are steadily weakening; nearby time spreads are narrowing while LME inventory cancelled warrants are on a steady uptrend. This may finally convince those traders, analysts and reporters who had attributed price rises to “speculation” that the fundamentals have indeed been improving.
The narrowing in spreads tells us that availability is tightening, which together with the improving inventory picture makes for a positive price outlook, in our view, and given the build in short positions during the recent sell-off this also raises the potential for short-covering rallies.