The Case for and Against Copper, Base Metals, and Industrial Assets

Copper, base metals, and industrial commodities are economic growth or contraction barometers. Supply chain issues during the global pandemic, the highest inflation in four decades, the bifurcation of the world’s nuclear powers, and green energy initiatives lifted industrial commodity prices to multi-year and, in some cases, all-time highs in 2021 and 2022. In 2023, prices have corrected as the U.S. and global economic landscapes face mounting recessionary pressures.

Low interest rates fed the industrial commodity rallies, but rising rates since March 2022 have increased the cost of carrying inventories, causing prices to correct lower. Moreover, China is the demand side of the fundamental industrial metals and commodity equation, and COVID-19 lockdowns and a weak Chinese economy have weighed on the demand and prices.

It is virtually impossible to pick bottoms in falling markets as they can decline to illogical, irrational, and unreasonable price levels that defy fundamental analysis. However, markets tend to find bottoms when technical trends point lower, and supply and demand factors are supportive. Copper, base metals, and industrial commodities face bearish technical trends, but the fundamentals remain bullish, creating a potential opportunity for patient investors and traders.

Copper is the industrial metals leader – Prices have declined

• Doctor Copper is a barometer for the health and well-being of the global economy, rallying during expansion and declining during contraction.
• Copper futures prices on COMEX declined from a record $5.01 per pound in March 2022 to under $3.75 on June 2, 2023.
• London Metals Exchange copper forwards tend to lead aluminum, nickel, lead, zinc, and tin forwards on the world’s leading nonferrous metals exchange.

Lumber is an illiquid market – Lumber is a barometer

• Lumber, copper, and crude oil are industrial commodities reflecting economic growth or decline.
• Lumber futures suffer from low open interest and volume. Open interest is the total number of open long and short positions in the futures market.
• Lumber futures prices have plunged from well over $1,000 per 1,000 board feet in 2021 and 2022 to below the $500 level in early June 2023.
• Copper, lumber, and crude oil prices have moved significantly lower, with oil falling from over $130 per barrel in 2022 to below $72 in early June 2023.

The case against the industrial commodities in mid-2023

• Rising interest rates have increased the cost of carrying industrial commodity inventories, weighing on prices.
• Economic contraction is bearish for industrial commodity prices as it decreases demand.
• China is the leading industrial commodities consumer. Economic weakness in China has weighed on the demand.

The factors favoring the upside

• Low inventories favor price recoveries after industrial commodity price reach bottoms.
• Hand-to-mouth consumption can lead to shortages as producers cut back on output.
• Inflation has caused the cost of production to rise, putting upward pressure on prices. Production declines and shortages occur if prices do not keep pace with cost.

Risk reward is critical when positioning for a recovery

• The odds favor significant bottoms during the current industrial commodity price weakness period.
• The trend is always your best friend in markets, and it remains bearish in early June 2023, making buying a contrarian approach.
• When buying and accumulating industrial commodities, related equities, or ETF/ETN products, leave plenty of room to add on further declines.
• Fundamentals and technicals are powerful when they align. When they diverge, they create confusion, leading to increased price variance and blow-off lows or highs.
• Balance risk-reward dynamics so the odds are in your favor by entering risk positions at comfortable levels that tilt the odds of success in your favor.