Citigroup鈥檚 Metals and Mining team issued a note Monday talking about how fund flows鈥攏ot global economic growth鈥攁re driving commodities prices higher. While copper鈥檚 skyhigh price makes sense because inventories are so low, the other industrial metals don鈥檛 have the same problem. Still, prices are rising.
The Citi report鈥攂rought to the market鈥檚 attention compliments of a story on the site鈥攕ays: 鈥淎luminium, zinc, lead and nickel are 鈥榓ping鈥� copper, even though their credentials are far inferior to copper.鈥�
There鈥檚 an explanation, of course:
Funds buy baskets which have fixed components. Those baskets consist of commodities that have genuine claims to superior performance along with lower quality 鈥榩retenders.鈥� All live happily ever after side by side in the baskets. Until Economics 101 emerges from the cupboard. At the moment the 鈥榝inancing deals鈥� that have temporarily sanitised mountains of aluminium inventory are conspiring against 101. An unattractive contango and high carrying costs are threatening this sanitisation.
Citi says 鈥榩eople committing those fund flows do so in anticipation of the fact that the market will eventually wise-up to the 鈥榦ngoing supercycle鈥�, and will justify the current seemingly unjustifiable rises鈥︹��
All of this is similar to that little problem the U.S. faced with its sub-prime lending crisis, it said, where lending 120% of a property鈥檚 value to sub-prime borrowers was scientifically explained away by lumping them into 鈥榖askets鈥� with better-quality borrowers.
Watch this space.