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Investing in diversified mining companies reduces risk while offering exposure to more profitable resource market segments
While precious metals like gold and silver tend to get the most attention from investors, they’re not the only options out there. Investing in base metals can also be a profitable endeavour for those interested in an arena that is a little different.
But what exactly are base metals? Generally they are more abundant in nature than precious metals, meaning that they are priced much more cheaply. They tend to be used for commercial and industrial purposes, and oxidize or corrode relatively easily when they are exposed to air or moisture. Copper is one of the most common base metals.
All base metals are affected by diverse factors, though in some cases the markets for different base metals are linked. Having a grasp of those factors and of the ways the various base metals interact with each other is essential for investors wanting to gain exposure to the space. With that in mind, we’ve put together a brief overview of a number of different base metals and how to invest in them.
Investing in base metals: Copper
Copper is perhaps the best-known base metal, and it’s not hard to see why. It has a wide range of applications, and is used in everything from wiring and plumbing to coinage and electronics. Indeed, copper is so widely used that it’s considered a valuable indicator for health of the global economy — some people even refer to the red metal as “Dr. Copper.”
The 2017 outlook for copper is uncertain, but some analysts are calling for a market deficit for the first time in six years. No significant new sources of the metal are expected to come online in the near term, and Q1 stoppages at the world’s two largest copper mines have limited output of the metal. That said, the copper price has not reacted as strongly to those and other factors as some have hoped.
Copper is relatively easy to invest in. Those interested in gaining exposure to the metal can invest in copper futures, copper exchange-traded funds (ETFs) and of course copper stocks. Many major miners are involved in the copper space, but those interested in smaller copper companies also have a slew of options. As with many metals, the key is to do enough research before jumping in.
Investing in base metals: Zinc and lead
While copper is one of the most popular base metals, zinc has definitely been getting some attention in 2017. It was the best-performing LME metal in 2016, and while the zinc price hasn’t performed as well so far this year, many experts remain optimistic about its prospects. Their positivity largely stems from supply-side factors — over the last several years a number of large zinc mines have closed, and the consensus is that not enough new mines have come online to replace that output.
Any discussion of zinc would be incomplete without a mention of lead. While they have different uses, they tend to be found together, often in conjunction with copper. For that reason, zinc market activity can affect lead market activity (and vice versa). That can sometimes cause problems, but at the moment both metals are performing relatively well.
As with copper, those looking to invest in zinc and lead can also look at futures, exchange-traded products like ETFs or stocks. Since the metals are often mined in conjunction with each other or with copper, it is difficult to find pure-play zinc and lead companies.
Investing in base metals: Other options
Iron ore and nickel are two final base metals that investors may want to consider. Both are essential in the world today, but are currently getting less attention than copper and zinc. Iron ore in particular has been suffering lately — it’s a key component of steel, and its price has been falling in conjunction with dropping Chinese steel prices. Other factors, such high iron ore inventories in Chinese ports, have also weighed on the metal.
The nickel price is faring better — in fact, as of mid-April 2017 it was up about 20 percent year-on-year. However, its movement was choppy in Q1, and while some believe a price rise is coming, others think that choppiness will continue until new price drivers emerge.
Nevertheless, some investors still believe that both of these metals could present opportunities for investors. After all, those who get in early during down markets can sometimes see incredible profits later on. Again, the key of course is to be informed and do adequate due diligence.
This description was last updated on April 22, 2017.