The recent metals price rally was well beyond what fundamentals justify, driven by a confluence of geopolitical tensions, weakening US dollar, fragmented supply chains and elevated risk premiums that are attracting both risk-averse capital and speculative funds into commodities. While these macro forces have often influenced commodity markets, a new dynamic has emerged – the eastward shift of financialization toward China. Recent regulatory clampdowns on Chinese speculation have revealed the outsized influence of Chinese capital flows – not yet matching Western institutional investors in absolute size, but substantial enough to move global markets.
Metal markets are well supplied, for the most part
The fundamental supply-demand picture across major commodities shows few signs of scarcity. Precious metals have rallied in synchronized fashion as investors have rotated into hard assets. This rotation has been driven by persistent geopolitical risks, elevated government debt levels and concerns around global trade dynamics.
Tariff-related uncertainty has prompted pre-emptive stockpiling across precious metals, particularly into US warehouses. Silver experienced significant price escalation ahead of China's January 2026 export restrictions, reflecting the complex interplay of macro uncertainty and supply chain concerns.
Copper is approaching a physical tightness but will take a few years to work through the surplus. Although the surplus is slowly decreasing, helped by recent production guidance cuts from major producers, the market is becoming more sensitive to supply disruptions. Prices have moved sharply, with copper reaching nominal highs above $13,000 /t in January following Freeport McMoran's production update for Grasberg in November. This disruption refocused investor attention on supply fears for a metal that is critical to the economy.
Nickel has also rallied dramatically, surging roughly 30% in recent months on reports of potential Indonesian quota reductions. Investment fund positioning has shifted notably in response to these developments. However, nickel markets are forecast to remain in structural surplus throughout the forecast period. Global nickel supply is expected to grow steadily, driven primarily by Indonesian and Chinese capacity expansions. Demand growth, while positive, is expected to be more modest. The shift toward lower-cost battery chemistries has reduced the intensity of nickel use per battery.
Tin prices have surged to over $45,000 /t, marking a 40% year-to-date gain and positioning it as one of the best-performing base metals. The price rally is primarily driven by supply disruptions in Indonesia, Myanmar and the DRC, combined with record speculative interest, despite rising exchange stocks and weak physical demand. While Indonesian exports have rebounded, regulatory uncertainty threatens further disruption in 2026.
Lithium presents perhaps the most interesting case. Recently, an overhang of feedstock inventories has been sharply eroded by strong demand growth from the energy storage sector. However, manufacturing output has drastically exceeded battery installations pushing active material and cell stocks to record levels. Even without a supply response to the current market, production will outpace demand growth this year, leaving little support to this bullish price run. Still, changes in Chinese policy represent risk – expiry of cell and cathode export VAT rebates will frontload orders in 2026, and mine permitting reform in Jiangxi may still disrupt a large contribution to supply.
Across these commodities, the fundamental supply-demand picture suggests adequately supplied markets. Disruptions and policy adjustments in well-supplied markets take time to work through the system yet prices have moved sharply in recent months. The timing and the money flows point to a new amplifier in the market – China.
The eastward shift: China as the new pole
The question of what is driving investor behavior in commodity markets is not straightforward. Geopolitical risk, inflation concerns and excess liquidity all play a role, but none provides a complete explanation that fits with other asset prices – particularly relatively stable bond yields. However, what is clear is that the center of gravity of commodity financialisation is shifting eastward. China is emerging as a new and distinct source of capital flows into commodity markets – one that operates differently from Western institutional investors and is beginning to move global prices.
Trading volumes on the Shanghai Futures Exchange have spiked dramatically in 2024-2025, reaching record highs in December, while London Metal Exchange volumes have remained steady. The recent clamp-down on speculative investing in China made manifest the power of Chinese funds. They are not yet the size of their Western counterparts, but they are big enough to move markets. Moreover, with the latest expansion of access to the futures market to overseas traders transforms China into a premier price maker for commodities.
Why is China becoming the epicenter of commodity financialization? Three factors converge:
- First, information proximity. Chinese investors have better visibility into Chinese demand and supply chains. Commodity exposure feels less abstract to a wealth manager in Shanghai than to a fund manager in New York.
- Second, limited alternatives. China's property market has been in crisis for years. While strong in 2025, the equity market has seen years of extreme volatility. Bank deposits offer poor returns, and capital controls make it difficult for Chinese investors to get exposure to foreign assets. For Chinese savers and investors with substantial wealth, commodities on SHFE represent a tangible asset class with genuine exposure to China's economic activity.
- Third, policy stimulus. The Chinese government has implemented consumption stimulus programs to offset property weakness, and monetary and liquidity policy has eased. Combined with China's structural high savings rate, this creates a pool of capital with limited deployment options.
Arbitrage between SHFE and LME ensures that price moves in Shanghai transmit to London. Because China is so large – both as a consumer and now as a speculative market – even domestic financial flows can move global prices. A surge in speculative positioning on SHFE in copper pushes prices higher in Shanghai, which triggers arbitrage buying in London, which then influences global pricing.
The new reality for commodity markets is here
The center of gravity of commodity consumption has long been in China. Now, the center of gravity of commodity financialisation is following. As China's role in physical commodity consumption has grown, so too has its role in financial speculation. The two are converging, creating a market where financial flows from a captive, liquidity-rich market are increasingly influential in setting global prices. This is the newly emerged center of financialization, and it is making its presence known to the commodity markets. This is increasing volatility and amplifying supply and demand signals. Understanding these signals becomes a critical component of navigating the uncertainty ahead, and CRU can help with our broad commodtiy value chain coverage.
