Futures markets and fundamentals of base metals

According to the theory of storage, the interest-adjusted basis equals the warehousing cost minus the convenience yield (i.e., benefit of holding a physical commodity) per time unit. By assuming that warehousing costs relatively constant at alternative stock levels, the interest-adjusted basis will be inversely associated with the convenience yield.In this article, we explore whether the sign of the interest-adjusted basis determines the degree of association between spot and futures returns on the six London Metal Exchange base metals-aluminum, copper, lead, nickel, tin, and zinc. In addition, we study to what extent the sign of the interest-adjusted basis correlates with the business cycle of industrial production of various countries (e.g., US, G7, OECD, Russia, and China), and with the business cycle of consumption/production of the aforementioned six base metals.We conclude that a negative interest-adjusted basis is generally associated with booming industrial production, a negative or small metal surplus (i. e., production minus consumption), and low metal stocks. To our knowledge, this is the first study to link metal market fundamentals to futures markets dynamics.