January 12, 2017 | Southern Copper’s (NYSE:SCCO) $1.2 billion expansion of its Toquepala open-pit mine in southern Tacna, Peru, will be ready by the end of the year and in operations early 2018. … Read MoreGet Copper Stock Investor Kits
Base metals are key for a range of commercial and industrial uses in buildings, vehicles and electrical infrastructure. Traded on a variety of metals exchanges around the world, base metals are widely available and play a key part in the global economy.
Case in point: copper is often called “Dr. Copper” in reference to the idea that the red metal has a PhD in economics given that it tracks the global economy so well. Copper is used for electrical wiring in everything from household appliances to large scale industrial projects, and with an increasing shift towards clean energy and electric vehicles, it’s no surprise that market watchers see copper demand rising for years to come.
However, despite their widespread use, an ongoing bearish metals market has kept pressure on other base metal prices.
Opinions on the near-to-medium term future for copper are fairly divided. While some see issues for copper supply on the horizon, others say that the current state of oversupply will persist a little longer.
Still, many see the market shifting into deficit to drive prices higher by 2017-2018 despite slowing demand growth from China. That’s due to falling mine grades and a lack of new projects coming online.
Taking a look elsewhere in the base metals space, iron ore – used to make steel – has been under much more pressure as a result of oversupply. The metal has been hit hard by relentless supply expansion from the likes of BHP Billiton (ASX:BHP,NYSE:BHP,LSE:BLT), Rio Tinto (ASX:RIO,NYSE:RIO,LSE:RIO) and Vale (NYSE:VALE), and despite a slight rally near the start of summer 2015, iron continued to hit multi year lows in 2015. Goldman Sachs (NYSE:GS) said in June that they see the iron ore price dropping more than $10 to sit in the range of $49 to mid-$50 per tonne.
For nickel, the situation is a little more measured. After a bullish streak in 2014, the nickel deficit predicted for 2015 hasn’t materialized. Firms such as Morgan Stanley have lowered their price outlook for the metal on the back of falling spot prices and rising stockpiles on the London Metal Exchange (LME). Still, nickel prices haven’t fallen quite as much as prices for iron in 2015.
Meanwhile, zinc had a good year in 2014, and many started off the year calling for a supply crunch in 2015. However, spot zinc prices have fallen about 17 percent since March
Still, there remains a fair bit of enthusiasm around the base metal long term. Many of the larger zinc mines around the world are closing, and analysts have noted that there isn’t enough production coming online to replace them.
Stefan Ioannou of Haywood Securities has also argued against the idea that China would ramp up production to counteract a deficit, stating that the country would need to double its historic growth rates to keep up with global zinc demand.
Overall, prices are not the strongest for most base metals at present, but investors and market watchers see upside in the medium to long term. There’s something to be said for looking for dips in the market. For those willing to do a bit of research and due diligence, a bear market can hold plenty of opportunity.
Investing in base metals
Copper, zinc and nickel trade on the London Metal Exchange and on other commodities exchanges around the world, so it is possible to invest somewhat directly in these metals. Interested investors can set up an account with a broker who handles futures trading contracts in order to trade contracts for aluminum.
One can also invest in exchange traded funds (ETFs) focused on base metals. Some, such as the Pure Beta Copper ETN (NYSEARCA:CUPM) or the United States Copper Index Fund (NYSEARCA:CPER), focus on individual metals, while others, like the Powershares DB Base Metals Fund (NYSEARCA:DBB), are more diversified.
Alternatively, investors can buy shares in base metal mining companies. There are a range of options, from early stage junior explorers with plenty of risk and upside potential, to developers and established producers. Some of the largest diversified mining companies in the world have large stakes in base metals, as mentioned above.