Metal Price Term Structure

One insight into the short-term pressures on metal prices comes from movements in the price structure on forward markets. The blue bars in the chart are a summary measure of the differences between forward prices and cash prices for the six main daily traded nonferrous metals - aluminium, copper, lead, nickel, tin and zinc - on the London Metal Exchange. The spread between cash and forward prices at the end of August remained positive for the ninth consecutive month. The size of the spread has been relatively modest but enough to keep downward pressure on prices. A widening price spread will usually mean supplies are abundant and that forward prices will adjust to reflect the financing and warehousing costs of holding metal. Narrowing spreads - with the term structure possibly moving into backwardation - will tend to mean near term shortages of metal which lead to upward pressure on spot prices. The daily price movements offer some of the most timely information about changes in the underlying condition of the metal markets.