Base Metals Break Out

Base metals–as opposed to precious metals like gold and silver–are widely used in commercial and industrial applications, and their price movements can provide insights on the health of the global economy. And despite the observation that we are in the latter part of the economic cycle, base metals are certainly breaking out.

And it’s not just copper, the metal considered to have a Ph.D. in economics; zinc also broke through the $3,000/ton level for the first time in 10 years, and aluminum prices recently hit a three-year high. So, what’s happening here?

As usual, when something happens in the base metals markets, for better or worse, all eyes turn to China: the world’s largest consumer of industrial metals and one of the largest producers. However, China has curtailed its production of base metals, perhaps because of a slowing economy, but also to combat pollution. The world’s biggest aluminum producer, located in China, announced on Monday, August 21, that it had taken production capacity equal to 4.5% of last year’s global production offline. Similarly, nickel production in China is down 9% from last year’s levels at this time.

But it’s not just supply that is being contained here. Per Matthew Peterson, Chief Wealth Strategist, “We believe that the market is starting to discount the “China hard landing” story. We have been told for so long that the Chinese economy is about to disintegrate; maybe the market is starting to discount this possibility. Maybe China will instead start to behave like a normal economy, with ups and downs, but not booms and busts.” If you take away the nightmare scenarios for the Chinese economy, the range of potential outcomes for the global economy improves, and the metals markets are sensitive to that change. Of course, it could be premature to suggest smooth sailing for China’s economy as it still has not announced how it will deal with its bad debt problem.

 

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