Global commodity markets are currently witnessing divergent price behaviour. In recent weeks, crude oil and many base metals have seen sharp price spikes. On the other hand, there are commodities that have not seen any significant price movement during the same period. Debate among market participants is around factors that have driven prices of some commodities up notwithstanding the fact that fundamentals in some cases are weak.

Base metals Among base metals, copper and zinc prices gained about 8 per cent and nickel 11 per cent. Aluminium and lead moved up by 3-4 per cent. The most interesting aspect of the recent price behaviour is that exchange-traded commodities have rallied as headwinds have lost some velocity.

For instance, although the dollar gained dramatically in the last several months (pressuring commodity prices), it has lost the momentum in recent days and has softened somewhat. From 1.07 to the euro, the dollar is currently trading weaker at 1.12. Energy prices have firmed too in recent weeks. It is of course well recognised that energy prices impact the cost of production. This has encouraged speculative positioning on the long side. On the LME, positioning report suggests new length in case of zinc.

That exchange traded commodity prices have rallied strongly suggests the influence of the financial market on commodities rather than market fundamentals. The improving macroeconomic situation appears to be the trigger for the upward thrust in prices.

Price correction? It is clear that in case of markets that are currently oversupplied, sooner rather than later, the upward price movement will have to revert in the form of a correction. In some cases such as copper, the fundamentals will soon begin to catch up. Specifically, copper demand is showing signs of a pick-up (China investing heavily in power grid) and investments on hold suggest a slowdown in future supply growth. On the other hand, the zinc market seems to be clearly oversupplied, raising the risk of a price correction soon.

In case of crude, there is a strong view that prices have overshot to the upside and that fundamentals will soon assert themselves. With the US production set to hit a peak this quarter, the global stocks will have to rise. The surplus will take time to work off. In other words, the rally runs the risk of petering out and prices risk a correction of up to $10 a barrel.

As one expert commented, ‘if oil has brought base metals prices up, it can also bring them down unless fundamentals suggest otherwise’. At the same time, sometime in the second half of the year, crude market will begin to rebalance, and in the process, the market is sure to face some hiccups.

While copper, zinc and nickel all gained over the week ended May 8, on Monday LME cash copper closed a tad weaker at $6,369 a tonne, while zinc was down 2.1 per cent to $2,312/t and nickel nearly unchanged at $14,241/t.

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