Markets in deficit: why base metal prices keep rising

by Julia Gro, Euro on Sunday

VMany economists are assuming that the central banks will not be able to curb high inflation any time soon. According to a survey by the ETP provider Wisdomtree, more than half of the around 600 wealth managers surveyed currently see inflation or errors in the central banks’ monetary policy response as the greatest risk for investors. 46 percent intend to hedge against this with an allocation to commodities. They have more than done justice to their role as protection against inflation in recent months with strong price increases. In the case of industrial metals in particular, however, there still seems to be room for improvement.

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markets in deficit

Of the four most common base metals, copper, aluminium, zinc and nickel, there is a risk of undersupply for three in the current year. A few days ago, the International Copper Study Group (ICSG) reported a supply deficit of almost 300,000 tons for the global copper market in the first ten months of last year. The deficit was thus much larger than originally expected. Even if supply has since been successively expanded, the excess demand is likely to continue in the current year.

Forecasts and reality diverged even further at zinc: the relevant organization there had expected a surplus for the past year. Instead, here, too, demand clearly exceeded supply. “In the meantime, leading zinc manufacturers have announced production cuts in Europe,” says Daniel Briesemann, commodity analyst at Commerzbank. High energy prices make production unprofitable, so supply remains tight.

Electricity prices weigh on producers

The sharp rise in electricity prices and the trend towards more sustainable production are also having a negative impact on the aluminum market. Although production reached record levels last year, demand exceeded supply by around a million tons. This year, the gap between supply and demand is expected to widen even further: the expected deficit could climb to 1.4 million tons.

With the WisdomTree Industrial Metals ETC (ISIN: DE 000 A0K RKG 7), investors can bet on further rising prices for industrial metals. Futures prices for copper account for 33.8 percent, aluminum for 29.5 percent, and zinc and nickel for 20.6 and 16.1 percent. The annual fee is 0.49 percent, there is a currency risk.

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Image sources: iStockphoto, Aurubis AG