Forget the selloff. This metals rally’s got legs. Even with aluminium near a five-year high, there’s scope for more gains to $2,500 a metric tonne, according to Commodities World Capital, a new hedge fund that says it’s returned more than 10% in the past year. Zinc will likely surge to $3,500 a ton in six months, chief investment officer Luke Sadrian said in an interview. Aluminum and zinc traded at $2,114 and $3,015 on Friday.
“If many people think the base metals are getting overdone, our thought process is the base metals rally has just started,” said London-based Sadrian, who’s previously managed money at Brevan Howard and Moore Capital Management. “The favourite trade now is being long aluminium and long zInc Having said that, we also favor copper at points in time.”
Metals resumed a selloff on Thursday as the dollar climbed after Fed Chair Janet Yellen said the US economy is robust enough to withstand higher interest rates and a reduction in the Fed’s balance sheet, while China’s credit rating was cut by S&P Global Ratings for the first time since 1999. Contracts extended declines Friday on a report that North Korea could be considering the testing of a hydrogen bomb in the Pacific Ocean.
Prices soared to the highest in three years early this month as officials in China doubled down on efforts to rein in production and clean up the environment before a key political meeting in October. More shutdowns are planned this winter to curb pollution, while demand in the country is holding up, spurring banks such as Citigroup Inc to boost price forecasts.
“I think we’ll have a pretty sustained bull market in base metals for the next 12 to 24 months” because there hasn’t been any capital expenditure in the sector for the past few years, Sadrian said Wednesday. “Inventories are getting drawn down, demand is healthy.” The company that Sadrian founded in 2016 with three others manages about $24mn in partner capital, he said.
The London Metal Exchange Index of six metals is up 18% this year as resilient global demand combines with constrained supply to push up prices. Aluminum is the standout performer, rising 25% and touching the highest level since 2012. Zinc is up 17% and near a 10-year high, while copper has added 15% and reached its best level since 2014. While China is shuttering inefficient aluminium plants, “capacity will come back online next year, in 2018, and 2019,” said Sadrian. “It’ll be the gap between when it goes off and when it comes back on that will be the key. That’s when the market will tighten up. It’ll be in a very short-term deficit.”
Copper has dropped from a high of $6,970 a ton this month and was at $6,377 on Friday. Barclays Plc has warned output shortfalls are “over-hyped” and Goldman Sachs Group Inc has said the metal’s been about 10% above fair value. Rene van der Kam, managing director of Viant Commodities Pte and former metals head at Gunvor Group Ltd, says there’s no market tightness.
Sadrian, who’s tracked commodities since 1991, is looking to go long copper as he targets a surge to $7,500 by the end of the first quarter. “Copper at $6,500 is probably the time to buy,” he said. “I think if you had missed buying on the way up, I would probably buy now.”
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