Base Metals: A rally may be overdone says Citi Research

A rally in base metals may be overdone, said Citi Research. The London Metal Exchange Index is up 7.2% since June 12.

However, Citi does not believe that current supply-(and)-demand fundamentals justify this rally and expect prices to correct lower.

According to Citi, the rally has been driven by paper-market positioning on the back of improving macroeconomic sentiment, money inflows including those from commodity trading advisers, and anticipation of more positive supply/demand conditions next year, such as zinc mine closures.

“Rather, supply-and-demand fundamentals have actually weakened for a number of metals, including growing refined copper production, rebounding aluminum production in China, weak demand from real estate, and corruption investigations at China State Grid,” said Citi.

Citi sees improvement in market fundamentals for most base metals later in the year, but says the current rally has gone too far too fast.