Base Metals and Industrial Commodities – Q2 Overview – Q3 Outlook 2021

Base Metals and Industrial Commodities Weekly Component Report PDF-07.28.2021

Base Metals and Industrial Commodities Weekly Component Report Spreadsheet-07.28.2021

Base metals prices moved higher since July 21, with all of the metals that trade on the London Metals Exchange posting gains. Iron ore for December delivery and uranium edged lower, but the Baltic Dry Index and lumber prices moved to the upside. Uranium edged lower but yellow cake prices moved higher.  

COMEX copper rallied 4.92% since July 21. The red metal hit a new all-time peak on May 10 as the continuous contract reached $4.8985. September futures settled at $4.4820 per pound on July 28 after trading to a high of $4.8840 on May 10 and a low of $4.0940 on June 21. Three-month LME copper was 5.24% higher to $9,728.50 per ton on July 27. Open interest in the COMEX futures contracts was up 5.77% over the past week. Short-term technical support for the copper market is at $4.1665, the July 19 low. The next significant levels on the downside are $4.0880 and $3.8760, the low from early March. Technical resistance moved higher to $4.6010, the June 11 high.

Chinese demand and output from South American producers will continue to be the most significant factors in the path of the price of copper over the coming weeks and months. Meanwhile, increased demand from green technologies is increasing copper requirements while supplies are not keeping pace. It takes nearly a decade to bring a new copper mining project online. A US infrastructure program will increase copper demand.

The trend in copper remains bullish, but as I wrote, when copper was on the way up, the risk of a correction rose with the red metal’s price. Goldman Sachs expects copper to rise to a new all-time high calling the metal the “new oil.” Jeff Currie, Goldman’s commodity analyst, pointed out that the inflation-adjusted high in the LME copper forward market came in the 1960s at over $14,000 per ton. Goldman expects the price to rise to the $15,000 per ton level in 2025. The investment firm’s 2011 target is the $11,000 per ton level. Other analysts are calling for even higher prices for the red metal. Bull markets can take prices higher a lot faster than analysts believe possible, but they also suffer periodic corrections, which can be brutal. Catching a falling knife is dangerous.

Copper is a leader in the base metals and industrial sector. The red metal is also a barometer for the global and Chinese economies. Copper’s ascent to new highs was a sign for all commodity prices. Inflationary pressures are bullish for the red metal and the asset class. Copper made higher lows and higher highs since March 2020. However, increasing interest rates makes the cost of carrying inventories higher and can weigh on the red metal’s price. Inventories of copper on the LME and COMEX moved in opposite directions over the past week in a continuation of the recent trend of rising LME stocks and falling COMEX inventories. LME stocks stand at over 225,000 tons are at the highest level since 2020. Expect lots of volatility in the copper futures arena over the coming weeks and months. I remain bullish on the base metals and shares of producing companies for the medium to long term.

The LME lead price moved 1.97% higher to $2,351.00 per ton on July 27. The rise in demand for electric automobiles around the world had been supportive of lead in the long term as the metal is a requirement for batteries. Since late April 2020, the prices of crude oil, gasoline, and lead moved higher. Meanwhile, a lead surplus has been building in China, but the price is rising because of the magnetic impact of copper and the other base metals that trade on the LME. $2,000 per ton was a pivot point for the three-month lead price. The price remains well above that level.

The price of nickel forwards moved 4.29% higher since the previous report. Elon Musk encouraged nickel production as he issued a plea to “any mining company in the world to mine more nickel.” The message turned out to be a very bullish message for the volatile metal over the past months. Musk is working on a supply deal with BHP, the Australian commodity giant. He is also in negotiations with other Indonesian producers. Mr. Musk, one of the world’s wealthiest people, is looking for supplies of “clean” nickel. Do not discount the potential for him to purchase a nickel producer to guarantee supplies for his business as his Tesla and other franchises, including SpaceX and the Boring Company, grow. SpaceX received a contract from NASA. The nickel price continues to trend higher, but it is a highly volatile base metal. Mr. Musk’s net worth recently rose to a level that is higher than BHP, the Australian mining giant that is one of the world’s leading nickel producers. Growing nickel demand for both stainless steel and batteries is likely to continue to underpin the price of the nonferrous metal.

Tin was 3.14% higher since July 20. Aluminum moved 2.03% to the upside since the previous report as of July 27. The price of zinc rallied 0.25% since July 20. Zinc was at the $2,962.00 per ton level on July 27.

September lumber futures were trading at the $608.20 level on July 28, 4.14% higher since the previous report, after plunging from a new record high at $1,711.20 per 1,000 board feet on the continuous contract on May 10. The July lumber price ran out of upside steam at over the $1,700 level, plunged, with the price not at less than one-third the value at the May high. Lumber can be a leading economic indicator at times. Lumber began falling before selling hit other commodity markets. The potential for an infrastructure building project by the US government could support gains in lumber futures.

Home improvement projects during the shutdown contributed to higher demand and prices for wood. Supplies have been a problem because of mill closures. The lumber futures market suffers from minimal liquidity, which makes it a highly volatile commodity. Lumber is often a leader and barometer for the commodities asset class. I never trade lumber but watch the price action like a hawk as it is a valuable guide for trends and trend reversals in the industrial commodity asset class. The winter months tend to be a weak period for the lumber market as construction activity declines, lowering the demand for wood. Lumber was very strong throughout the last winter season. The US infrastructure rebuilding package will likely support wood’s price. Lumber had been explosive over the past months. Before 2018, the all-time peak was $493.50.

As I wrote over the past weeks:

“The price action in lumber is a warning for all commodities that have experiencing substantial rallies.”

Lumber sent a signal that turned out to be significant. Lumber found support at the $500 level, the July 19 low.

The price of uranium edged 0.92% lower since July 21 at $32.30 per pound. The yellowcake price was at $272.50, up 4.81% over the past week. CCJ shares closed at the $17.68 level, up 2.26% since July 21. I continue to believe CCJ shares offer value and rate the stock as a buy at the current price level. The volatile Baltic Dry Index rose 3.70% since the previous report. The BDI was at the 3,166 level on July 28. Higher fuel prices have taken the freight index higher over the past months. December iron ore futures moved 1.22% lower compared to the price on July 21. Supply shortages of iron ore from Brazil have supported the price for more than a year. Rising iron ore and metallurgical coal prices have been a sign of strength in the global economy. Open interest in the thinly traded lumber futures market fell 7.00% since the previous report. The illiquid markets like lumber can become roach motels when a trend reverses, creating gaps that can cause significant financial pain for those on the wrong side of a move.

Never trade lumber, just watch the price action. The rise in lumber is a sign of demand for framing wood, a primary ingredient in new home construction. The plans for rebuilding infrastructure will increase lumber demand. The price plunge is the result of illiquidity. The Fed and others are pointing to lumber’s plunge as validation that inflation is “transitory.” What they do not cite is lumber’s liquidity makes the price volatility wild. Lumber appears to have found a bottom at the $500 level.

LME copper inventories edged 0.19% lower over the past week after double-digit percentage increases over the past weeks. LME stocks of the red metal stood at 225,225 tons as of July 27 and were 425 metric tons below the July 20th level. LME copper inventories had been steadily declining over the past months until they reached bottom below the 75,000-ton level and began to climb. The amount of copper in LME warehouses it at a new high for 2021. Copper stocks are often manipulated by dominant market participants. Since a Chinese company owns and operates the LME, the potential for manipulation to achieve price goals is always a factor for the red metal. I always view substantial and sudden changes in inventory data with a grain of salt. COMEX copper stocks fell 1.38% since July 20th and stood at 44,729 tons.

Lead stockpiles on the LME fell 7.76% over the past week. Lead experience huge inventory builds in March, but stocks have been falling over the past weeks. Aluminum stocks were 2.25% lower after a massive increase of nearly 50% in March. Aluminum LME warehouse stocks stood at the 1,408,000-ton level on July 27. Zinc stocks edged 0.35% lower since July 20 to 247,000 tons. Tin inventories were up 10 tons or 0.43% since July 20 at 2,315 metric tons.

Nickel inventories were 1.02% lower compared to the level on July 20. Infrastructure rebuilding in the US and Chinese economic growth support the base metals. Stockpile data can reveal supply and demand trends, but traders often use the inventories to influence perception and prices. Rising interest rates could attract more metal into exchange warehouses.

FXC moved higher with copper over the past week and was trading at $36.68 on Wednesday, up $2.03 per share or 5.86% since the previous report. I continue to maintain a long position in FCX shares. FCX tends to move higher and lower with the price of copper. FCX reached the highest price since February 2012, when it traded to $46.10.

As I have been writing:

“I remain long FCX at $11.37 and will use a stop on close above that level to protect capital. I would increase the level of the stop as FCX moves higher to protect profits.”

This position is up over 222%, so I would move stops higher to guarantee a substantial profit while riding the trend higher for the potential of more gains. There is nothing wrong with selling half the position and riding the balance for free with no capital risk.

Keep stops tight on all positions in this sector that is highly sensitive to macroeconomic trends. In the medium to longer term, the stimulus and potential for a US infrastructure rebuilding program are bullish for industrial commodities. Short-term bouts of risk-off periods could cause sharp selloffs. A falling dollar is likely to support higher prices; a rising greenback has the opposite effect.

We are long PICK, the metals and mining ETF product. We bought PICK at the $23.38 per share level, and it was trading at $47.18 on July 28, up $2.18 or 4.84% over the past week. PICK hit a new high of $52.39 on May 10, the highest level since February 2012. I continue to rate this metals and mining ETF that holds shares in the leading producing companies in the world a long-term hold. I would raise stops to guarantee a profit if a correction occurs as PICK has moved over 101% higher. Base metals and industrial commodities prices should continue to follow crude oil and stocks over the coming weeks. The strength in industrial commodity prices over the past months is a sign of inflationary pressures on the global economy.

Keep those stops tight on short-term positions. Do not allow a short-term foray into the market to become a long-term investment. More stimulus early this year, and the potential for an infrastructure project in the US is bullish for industrial commodity prices. Protect profitable long positions with stops.

As I wrote over the past weeks:

“The bullish trend in the sector continues during the first months of 2021. The price action in base metals continues to be constructive, but the higher prices rise, the greater the potential for a correction.”

Industrial commodity prices had been on bullish fire since March 2020 in a sign of rising inflationary pressures. After the dramatic rallies, there was room for substantial corrections that would not alter the long-term trends established over the past months. I remain bullish on the sector, but we could experience a bumpy ride after the latest Fed meeting. It is impossible to pick tops or bottoms in markets. Approach all risk positions with a plan for risk and rewards and stick to it! The price action over the past weeks that followed the June Fed meeting was a sign that buyers stepped into the base metals on the dip. The summer is a slow time in the base metals arena as Europe often shuts down in August.