London 08/07/2016 - The recent rally in base metals prices will be hard to sustain because it was driven more by liquidity and inflation expectations rather than the fundamentals, Macquarie said.
After the shock Brexit vote, the expectation of global central bank liquidity injections and a delay in the US rate rise drove up commodity markets, it noted.
In China, metal prices were also supported by a depreciation in yuan exchange rates, which is seen as potentially driving up inflation and boosting yuan-valued metal prices in the domestic market, the bank added.
“The recent rally is more driven by liquidity and inflation expectations rather than fundamentals,” the bank said, adding that is shown by
The divergence between futures prices and spot prices highlights the lack of fundamental drivers in the rally, Macquarie said. In nickel, for example, the SHFE price outperformed the spot price - the spread between the two widened to more than 1,000 yuan per tonne early in July.
"The physical market has clearly lagged [behind] the futures market over the recent price rally," it noted.
In the copper market, Chinese premiums dropped from an average of 100 yuan per tonne two weeks ago to 5 yuan early this week before recovering to 35 yuan.
"We have heard of buyers' resistance after the quick rise in copper prices in the domestic spot market," the bank said.
This is reflected in the sharp drop in copper outflow from major warehouses in Shanghai - stocks at SHFE warehouses rose 4.3 percent week-on-week to 161,894 tonnes as of July 1, the first increase after seven consecutive weeks of decline.
A similar trend of falling premiums can be seen in aluminium - domestic premiums fell from an average of 90 yuan per tonne two weeks ago to 10 yuan late last week before rising to 25 yuan this week - and in zinc, which followed a similar path.
(Editing by Mark Shaw)