Backwardation and Contango for the copper and aluminum market 2023

The copper market is currently in backwardation. Backwardation means that copper's spot price is higher than copper futures contracts' price and is generally associated with a bearish market. 

Copper futures compared to spot price 18.feb. Source: CME Group 18.02.2023

Backwardation in the metal markets usually indicates a tight supply in the futures contract market. This could be due to several factors, such as production disruptions, inventory shortages, or rising demand. 

The aluminum market is currently in backwardation as well. However, this seems to change in May, as futures contract prices exceed the spot price, assuming the spot price stays the same. Hence, from May through the end of this year, the aluminum market will shift to contango. This implies a change in the market for aluminum, indicating prices to rise in line with aluminum demand, as it is more valuable to hold the contract than to store the physical commodity.

Aluminum futures compared to spot price 18.feb. Source: CME Group 18.02.2023

Contango and backwardation are opposites. Investors that trade commodities with futures contracts that are thought to be in backwardation are likely to keep a long position. This is because a long position ensures a positive roll return. In contango, if investors buy the long end and sell the short end, they end up with a negative roll return; therefore, in a contango market, investors can short contracts to make a profit. Going forward, it will be interesting to keep an eye on the development, especially on demand, which we view as a critical factor in the coming year.