Many investors talk about the stock market’s gains this year, but another top-performing asset class was base metals, such as copper, zinc, nickel and other industrial metals.
New York copper futures prices are up about 24 percent, and the PowerShares DB Base Metals Fund (DBB), an exchange-traded fund that tracks copper, zinc and aluminum, has gained 22 percent. The gains come after some hard times for commodities because of oversupply and subdued demand the past few years. But global economic growth is helping industrial metals, and forecasts for worldwide growth in electric vehicles has underpinned other metals like nickel and cobalt.
Then just this week base metals like copper saw their gains erode. Market watchers, who are not surprised prices dropped, say the rallies in many base metals earlier in the year were overdone. Nevertheless, some experts believe the outlook should remain solid if global growth continues.
A revved-up global economy turns production surpluses into shortfalls. Base metals have outperformed the broader commodity complex for most of 2017, according to a research note by Barclays analyst Warren Russell. He says it’s no surprise that industrial metals have done so well because these metals are probably the commodity sub-sector linked most closely to global economic health.
Base metals are used in a variety of industrial applications. Copper is critical for plumping and wiring in houses and cars, zinc is used to galvanize steel, and lead is an ingredient for batteries. Many of these metals have widespread use in construction, too.
John Gross, editor of The Copper Journal and an industry consultant in the greater New York City area, says the global economic expansion and the uplift most assets received as an effect of the Federal Reserve’s quantitative easing to stimulate growth also boosted base metals across the board. Except for tin, nearly all base metals gained close to 20 percent year-to-date.
Gross and analysts at Commerzbank say research conducted by two industry organizations, the International Copper Study Group and the International Lead and Zinc Study Group, showed supply deficits for these metals in 2017. Since July, copper has had a supply deficit globally, with demand outweighing new production, and the group predicts this shortfall will continue into 2018. “That’s been a contributing factor to higher prices,” Gross says.
The Commerzbank analysts say the global supply deficit for lead and zinc was more severe, with demand outstripping supply the first three quarters of 2017. As recently as 2016, lead had a production surplus, while the deficit for zinc grew from 2016 to 2017. Next year, the supply in both markets should remain tight.
Nathaniel Polachek, portfolio manager and partner at New York-based Commodity Asset Management, says the outlooks for copper, aluminum and lead are solid. “We expect per-capita vehicle ownership to increase in both India and China leading to further increases in copper demand,” he says.
He also believes that the global demand for lead should continue increasing, while the supply of refined lead could diminish, with limited domestic scrap metal available. As aluminum smelters close worldwide, falling capacity growth coupled with higher demand could also support prices for lead, he says.
Russell sees other reasons for investors to be positive about base metals, particularly copper. Chinese demand continues to be high, and China is the No. 1 copper consumer, with the U.S. No. 2. Plus, there’s the long-term demand from electric vehicles, which will use more copper than traditional combustion engine cars, as copper is a good conductor of electricity.
China holds the key to 2018 prices. Polachek says he’s keeping an eye on nickel. The demand for it might continue to outpace output because of the growing number of electric cars over the next decade, but he’s cautious because the now-shuttered Philippine mines could reopen and increase production, with Indonesia also stepping up its production.
Even though copper has solid fundamentals, the market has likely gotten ahead of itself, price-wise, Russell says. Chinese demand may cool when the country’s credit stimulus subsidies are cut back, and he believes existing mines will produce more.
Copper prices have retreated from their October highs, Gross says. Although he expects prices will recover, one of the difficulties with estimating Chinese demand is that the country’s market is so opaque, he says. When the U.S. was copper’s top consumer, it was easier to gauge market cycles based on economic drivers, he says. While some data for China’s copper demand is available, the lack of complete information hampers forecasting.
Instead, Gross studies price charts to gauge the market’s direction. With copper falling recently to just below $3 per pound, he believes the price won’t drop much lower than $2.95 because the demand from end users should provide a floor. “We could see that before year-end, but the market [would] recover from that and move higher again, based on global economic growth,” he says.