Zinc hit a three-year high and aluminium touched a 16-month peak on Tuesday as investors sought more exposure to commodities with tightening supply-demand balances and were encouraged by falling inventories and firm equity markets. London Metal Exchange stocks of zinc fell by 400 tonnes to 656,275 tonnes, their lowest in 3-1/2 years, while aluminium stocks fell by 9,075 tonnes to 4.938 million tonnes, their lowest in nearly two years.
Investors are slowly being drawn back into commodities, attracted by stronger global economic growth and more volatility within some sectors, typified by current investment flows out of grains into industrial metals. "There's a certain amount of relative value going on where investors prefer one metal over another," Macquarie analyst Vivian Lloyd said.
She added, however: "In our view it's premature. The real tightness (in zinc) will hit next year, but (right now) it's a market half the size of copper with four times as much stock." Three-month zinc on the London Metal Exchange rose to $2,373, the highest since August 2011, before closing at $2,362 a tonne from $2,336 at the close on Monday. It has risen around 15 percent so far this year.
Forecasts for zinc prices have been driven higher this year by a paucity of big mine projects just as existing mines such as Century in Australia dry up. Also, data on Monday showed China's zinc imports rose 123.55 percent in June year on year to 68,475 tonnes, bringing gains for the year to 38.14 percent. Helping metals generally, a major index of Asian stocks touched a three-year high on Tuesday, while a Chinese index of the leading Shanghai and Shenzhen A-share listings closed at its highest in three months.
"The combination of stronger growth but less stimulatory monetary policy in the US is more likely to be a net positive for commodity prices - especially industrial metals - than for those of other assets ... provided there are no further shocks from China," Capital Economics said in a note. China's is the world's largest base metals consumer.
LME aluminium reached as high as $2,054 a tonne, the loftiest since February last year, bringing gains for the year to around 13 percent. It closed at $2,043 a tonne from $2,020. The discount for cash aluminium over the three-month price has fallen to 18-month lows amid dwindling exchange stocks, reigniting a long debate about how tight the market really is.
Years of aluminium smelter cutbacks due to depressed prices have eroded supply just as global demand recovers, in part due to a revival in the US and European auto sectors. Still, aluminium stocks remain high overall, with just under five million tonnes sitting in LME warehouses, and output in China is on the rise, prompting some analysts to question the sustainability of the rally. LME copper closed at $7,040 a tonne from $7,025 at the close on Monday, recovering a touch after recent inflows to exchange stocks sparked concern that an expected shift into surplus had begun.
The global world refined copper market showed a 183,000 tonne deficit in April, compared with an 84,000 tonne deficit in March, the International Copper Study Group said in its latest monthly bulletin. LME lead closed at $2,217 a tonne from $2,203, while tin closed at $22,125 a tonne from $22,200 and nickel at $19,000 a tonne from $18,825.