Metals in the Buy Zone: Stocks and ETFs to Consider

Ferrous and non-ferrous metals are the building blocks of infrastructure. Ferrous metals contain iron, while base or non-ferrous metals do not. Ferrous metals are magnetic; base metals are not. Ferrous metals are prone to corrosion or rust, while base metals are rust-resistant. Non-ferrous metals are typically lightweight, ferrous metals are heavier, and non-ferrous metals are easily recyclable.

Meanwhile, ferrous and base metals are critical for construction projects and many other industrial uses. Steel, cast iron, and wrought iron are ferrous, while copper, aluminum, nickel, lead, zinc, and tin are non-ferrous metals. While all metals are sensitive to the health and well-being of the global economy, China is the leading consumer of metals. Therefore, China’s economy is critical for the path of least resistance of prices. Moreover, as the world addresses climate change, the demand for metals is rising, as they are crucial for many green energy initiatives.

After reaching highs over the past two years, metals prices have corrected, which could be a golden buying opportunity for the coming years.

Base metals prices have declined

• Copper, the leading base metal, fell 24.9% from $5.01 in March 2022 to $3.7190 on August 11.
• Copper is the leading base metal on the London Metals Exchange.
• Aluminum, nickel, lead, zinc, and tin prices have followed copper lower since the 2022 highs.

Steel prices moved lower- Steel in China is stabilizing

• Steel prices peaked in late 2021 and have made lower highs and lower lows in 2022 and 2023.
• LME Steel HRC FOB China fell to lows in late May and has stabilized over the past months.

The leading metal-producing companies that will benefit from a recovery

• BHP Billiton Ltd. (BHP) is a diversified commodity producer with significant energy and metals mining interests. BHP shares have declined 26% from the March 2022 $79.66 high to $58.96 on August 11. BHP pays a $5.30 or nearly 9% dividend.
• Rio Tinto Group (RIO) is a leading metals and mining company. RIO shares declined 28% from $84.69 in March 2022 to $61.02 on August 11. RIO pays a $3.54 or 5.8% dividend.
• VALE SA (VALE) is a Brazilian mining giant. VALE shares fell 37.4% from $21.29 in April 2022 to $13.32 on August 11, 2023. VALE pays a $0.40 or 3% dividend.

Diversified ETFs that own metal mining companies or metals

• The iShares MSDCI Global Metals & Mining Producers ETF (PICK) holds nearly 25% of its assets in BHP, RIO, and VALE shares, with exposure to other leading worldwide metals-producing companies. PICK fell 23.7% from $53.00 in April 2022 to $40.43 on August 11. PICK pays a 4.6% or $1.85 per share dividend.
• The Invesco DB Base Metals Fund owns aluminum, zinc, and copper. DBB fell 32.9% from $27.01 in March 2022 to $18.12 on August 11.

Why Metals? Pros and Cons

• Con: Rising interest rates have increased the cost of carrying base and non-ferrous metals inventories, weighing on prices.
• Con: Weak economic data in China, the world’s leading metals consumer, have caused the demand to decline
• Pro: While Chinese economic data remains weak and sentiment is bearish, a recovery could suddenly lift metals prices.
• Pro: Falling U.S. inflation indicators will likely curtail the Fed’s enthusiasm for interest rate hikes as the economic condition trends towards the central bank’s 2% target level.
• Pro: Addressing climate change translates to rising metals demand for batteries and other green energy initiatives in the U.S. and Europe. A Chinese recovery could only turbocharge the demand leading to significant supply-demand deficits and higher metal prices.
• The bottom line- Scale-down exposure to ferrous and non-ferrous metals is a contrarian risk position that could pay significant dividends over the coming years.