NEW YORK: After luring investors this year with tantalising glimpses of renewed Chinese demand and supply constraints, industrial metals are losing their lustre.

Money is exiting long-only exchange-trade funds in a torrent, and hedge funds and other large speculators are starting to follow suit. About $90.4 million was removed on a net basis this month through June 28, heading for the largest outflow since July 2015, according to data compiled by Bloomberg Intelligence. Funds linked to industrial metals may see their biggest quarterly redemption since September 2015.

While lead, aluminium, copper and zinc remain among the best-performing commodities this year, investors have been cashing in on the metals’ earlier rallies. That’s because there are increasing doubts about demand growth in China and the US, the two largest economies, leaving one market — copper — in what Barclays Plc called a “price trap.”

“People are thinking, ‘What are we doing in these industrial metals ETF?” said John LaForge, the Sarasota, Florida-based head of real assets strategy at Wells Fargo Investment Institute. “’We’re not making any money. It’s not going anywhere.’ You’ll see flat prices for years.”

After a strong start to the year, most of the base metals are down since the end of March. The Bloomberg Industrial Metals Sub-index, which tracks aluminium, copper, nickel and zinc, is set for its first quarterly loss since 2015.

Compounding the blahs for investors is low volatility, which gives speculators little opportunity to profit from daily trades: the 30-day gauge, measured in price swings, is near the lowest in more than three years.

The enthusiasm of hedge funds also appears to be fading. In the week ended June 20, money managers pared their net-bullish bets on copper by the most in six weeks.

The attractiveness of other assets may be helping pull money out of metal ETFs. While the Bloomberg Industrial Metals Sub-index is still up 5.5 per cent this year, some equities delivered gains almost than twice as large. The MSCI All-Country World Index rallied for an eighth straight month, soaring more than 10 per cent this year, while the Standard & Poor’s 500 Index, which reached a record this month, has climbed 8.1 per cent.

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The sentiment has turned negative even as copper, the most-actively traded industrial metal, gained 4.5 per cent this month. The rally came as inventories tracked by the London Metal Exchange shrank by 22 per cent over the same period.

Prices were also pumped up as copper-pipe makers in China ramped up output, operating at almost 90 per cent capacity in June, while air-conditioner production surged, Dane Davis, a Barclays Capital analyst in New York, said in a June 26 report. That level of production is unsustainable, he said.

“Prices can’t get too bullish for copper because of the demand-side concerns in China,” Davis said in a telephone interview.

“At the same time, prices can’t get too bearish because of concerns over supply,” he said, referring to the decline in stockpiles and a deterioration in labour talks at Freeport-McMoRan Inc.’s Grasberg mine in Indonesia. “As a result, we’re in this middle-price trap for copper.”

Earlier rally

A long list of mine disruptions this year had helped to push prices higher. Those included a six-week strike at the world’s biggest copper mine, BHP Billiton Ltd. ’s Escondida in Chile, as well as a contractual dispute inhibiting shipments from Grasberg, the second-largest.

But with many of those supply concerns easing, Robin Bhar, an analyst at Societe Generale SA, pared his outlook for the red metal this year, while cutting his price forecast for zinc and nickel.

For many analysts, that puts the focus back on prospects for growth in China. James Butterfill, the London-based head of research and investment strategy at ETF Securities, belongs to the camp betting Chinese economic data for the second quarter will beat expectations. Premier Li Keqiang said the Asian nation remains on track to meet its main economic goals for this year, while warning of rising geopolitical risk and threats to the global upswing.

Copper has weakened since reaching a 20-month high in part because recyclers boosted output from scrap to fill the gap in supply and to benefit from rising prices. Goldman Sachs Group Inc. said Thursday it’s maintaining a bullish outlook, forecasting the price will reach $6,200 a metric ton over the next three months. Copper traded at $5,922 a ton by 11:30am in London, down 0.3 per cent on Friday. It’s poised for its first monthly gain since January.

‘Fundamentals intact’

“The recent weakness is more of a speculative unwind, because the fundamentals remain intact,” said Butterfill of ETF Securities, the largest provider of ETFs linked to industrial metals. “A lot of that speculative unwind is now done. For the first time in 11 years, we are seeing industrial metals fall into supply deficit, so broadly that should be supportive.”

The earliest indicators on China’s second-quarter outlook don’t support Butterfill’s optimism. Manufacturing showed signs of deterioration for the first time since August, according to the China Satellite Manufacturing Index, which fell below 50 in June. The S&P Global Platts China Steel Sentiment Index, a gauge based on a survey of traders and steel mills, remained at a lacklustre level — 38.12 out of 100 points.

While JPMorgan Chase & Co. analysts are keeping their trade recommendation to stay long on some metal contracts including July-delivery LME copper and July-delivery LME zinc, the bank expects base-metal prices except aluminium to soften in the second half, compared with their year-to-date averages, as demand slows in China. The bank also has a “long” recommendation on December-delivery LME aluminium.

Demand growth in China will slow to less than 3 per cent, hurting prospects for industrial metals in the second half, just as supply is expected to recover, the JPMorgan analysts said in a June 24 report.

“There are already signs that the copper spot-concentrate market is in better shape than at the start of the year,” analysts including Natasha Kaneva and Gregory C. Shearer wrote. “As supply recovers in the second half, we believe demand will likely simultaneously soften.”