The rally in metals is showing no signs of slowing down.
The Bloomberg Industrial Metals sub-index posted the biggest five-day gain since 2011, as zinc touched a nine-year high. Prices rallied after Chinas top economic commission approved a $36 billion plan on new rail links around Beijing, boosting demand for industrial raw materials.
- Zinc for delivery in three months rose 2.9 percent to settle at $2,900 a metric ton at 5:50 p.m. on the London Metal Exchange, after touching $2,985, the highest since October 2007.
- The metals volatility, measured in price swings in options, is at the highest since 2010.
- Lead is up 18 percent since Nov. 18, the biggest six-day advance since June 2009.
- On the Shanghai Futures Exchange, both zinc and lead closed limit up.
Zinc, used as a coating on iron and steel to protect against corrosion, is the best performer among 22 raw materials on the Bloomberg Commodity Index this year, with the metal rallying 80 percent this year, poised for the steepest climb since 2009. The metal will be in deficit through 2018, Bloomberg Intelligence analysts Kenneth Hoffman and Zhuo Zhang wrote in a note Monday.
There seems to be no stopping the juggernaut we are seeing in the LME metals, a move that is not being replicated in the commodity space with the exception of coal and the ferrous group, Edward Meir, an analyst for INTL FCStone Inc. in New York, said in a note.
Investors see zinc as the metal with the tightest supply situation given the multitude of closures that have taken place over the past two years, Meir wrote.
Industrial metals rallied almost 30 percent in 2016 as demand stabilized in China, U.S. President-elect Donald Trump pledged to invest in infrastructure and revitalize the U.S. economy, while mine closures curbed supply. Chinese investors have added to the speculative binge.
Were bullish on zinc and lead given the tightness in ore supply and potential production cuts at smelters in coming months, but the speed of the rally exceeds our expectations, Dina Yu, an analyst at CRU Group, said by phone from Beijing. There have been no big changes in fundamentals that can explain such a surge. The market is driven by bullish sentiment in all metals.
Copper for delivery in three months rose less than 0.1 percent to $5,881, and broke above $6,000 during the Asian trading day on Monday, bringing call contracts at that price into the money.
Copper is moving too fast, said Christoph Eibl, chief executive officer and co-founder of Tiberius Asset Management, which oversees about $700 million. Its not being driven by fundamentals. Its moving on speculative interest and short-covering in the options market.
Money managers extended record bullish bets on the metal, according to data on Monday from the Commodity Futures Trading Commission. Net-long positions in copper rose 8.2 percent to 76,346 futures and options contracts in the week ended Nov. 22.
Analysts also cited short covering as a reason why the rally in metals has moved so quickly. When prices were flat, many traders made money by selling options and betting the contracts would expire worthless, according to Guy Wolf, global head of market analytics at Marex Spectron. As prices rally, theyre faced with the prospect of having to pay out on the contracts and need to cover the position by purchasing futures, he said.
Its like being in a bush fire and trying to buy fire insurance, Wolf said. You have to take any price you can get.