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- Rising interest rates weigh on industrial metals
- Move in US Dollar Index bearish
- Lockdowns in China not helping
- Addressing climate change requires metals
- Leading mining company shares have corrected: Buying dips could be optimal approach
In 2021, Goldman Sachs’ commodity analysts declared copper is the new crude oil, and the price would move toward the $15,000-per-ton level by 2025. If copper on the London Metals Exchange reaches that level, it will put COMEX copper futures at over $6.80 per pound. In May 2021, copper rallied to a record high at just under the $4.90 level. In March 2022, the price probed above $5 for the first time.
Copper is not the only nonferrous metal that moved to record highs in 2021 and 2022. Aluminum, nickel, lead, zinc and tin all moved to record or multi-year highs.
Companies that extract the ores from the Earth’s crust have experienced a profit bonanza over the past year. As prices rise, the more attractive low-grade ores with higher production costs become. Meanwhile, the prospects for the demand side of the fundamental equations for the base metals remain bullish for prices.
Over the past weeks, prices have corrected, and mining shares moved lower. The iShares MSCI Global Metals & Mining Producers ETF (NYSE:PICK) holds shares in the leading mining companies and provides a diversified investment approach.
Rising Interest Rates Weigh On Industrial Metals
The prospect of rising US interest rates has weighed on copper and other industrial metal and mineral prices as higher rates increase the cost of carrying inventories.
Source: Barchart
As the chart highlights, the nearby 30-Year US Treasury bond futures have been falling like a stone in 2022, a move that began in July 2021. On May 5, the bonds reached the most recent low of 136.27, not far above the critical technical support level at the low of 136.16 registered in October 2018.
On May 4, the Federal Reserve increased the short-term Fed Funds Rate by 50 basis points. The Fed will start reducing its swollen balance sheet, pushing rates higher further out along the yield curve. While inflation remains at the highest level in more than four decades, higher rates have caused a correction in copper and other metals markets.
Move In US Dollar Index Bearish
The US dollar is the world’s reserve currency and the pricing benchmark for most raw materials. Rising interest rates have pushed the dollar higher over the past months, another bearish factor for industrial commodity prices.
Source: Barchart
Last week, the dollar index, which measures the US currency against other world foreign exchange instruments, marginally eclipsed the March 2020 high of 103.97. The higher dollar pushed commodity prices upward in other currency terms, stifling the demand as high prices cause consumers to cut back on purchases. Moreover, higher rates and a rising US dollar cause international wholesale consumers to reduce inventories and buy on a hand-to-mouth basis.
Lockdowns In China Not Helping
China is the world’s most populous country, with the second leading economy. China’s size and economic growth make the Asian nation the world’s top commodity consumer.
Recent COVID-19 lockdowns in Shanghai and other Chinese cities have caused a substantial decline in raw material demand. Interest rates, currency moves, and the lack of Chinese demand have combined to form an almost perfect bearish storm for copper, base metals, and other industrial commodities, pushing prices lower from the recent record highs. However, China’s lockdowns are a temporary event that will likely lead to pent-up demand over the coming weeks and months when the demand returns.
Addressing Climate Change Requires Metals
In the US and Europe, addressing climate change depends on copper and other base metals. In 2021, Goldman Sachs analysts said copper is the “new oil” and “decarbonization does not happen without copper.” Ironically, mining, smelting, and refining metals require traditional energies. As mining and refining companies move towards net-zero carbon emissions, the output will likely decline. At the same time, production costs increase because of oil and gas prices and new technologies to meet their carbon goals. Moreover, it takes the better part of a decade to bring new mines into full production.
The bottom line is climate change initiatives increase metals demand.
Meanwhile, the war in Europe and the standoff between China/Russia and the US/Europe will increase arms and military equipment production, requiring metals.
Leading Mining Shares Have Corrected: Buying Dips Could Be Optimal Approach
Bull markets rarely move in straight lines, and corrections are often fast and furious. Metals have come down from the recent highs, but they will likely find bottoms sooner rather than later. And the bull market trends will continue to take them to higher highs. It is impossible to pick tops or bottoms in any market as they often rise or fall to irrational, illogical, and unreasonable levels. Scale-down buying in industrial metals and minerals could be the optimal market approach for the coming months and years.
Mining companies tend to offer leverage to the metals prices as they extract them from the Earth’s crust and process them into deliverable form. Individual mining companies have idiosyncratic risks, including management, specific mining properties, and country risk in mining regions. A diversified approach to mining investment mitigates some of these unique risks. The iShares MSCI Global Metals & Mining Producers ETF product is a diversified mining product. The top holdings include:
Source: Barchart
PICK holds shares of many of the leading worldwide metal mining companies.
At the $41.39 level on May 9, PICK had more than $1.552 billion in assets under management. The ETF trades an average of more than 652,000 shares each day. PICK charges a 0.39% management fee and pays a blended $2.51 annual dividend, translating to a 6.06% yield. Holding the ETF for one quarter pays for the management fee and then some.
Source: Barchart
The chart shows that PICK peaked at $56 in 2012, and the most recent high was at $53 in April 2022. At the $43.82 level on May 6, the PICK ETF corrected, as copper and other metal and mineral prices moved lower. I favor a scale-down buying approach to the ETF, leaving plenty of room to add on further price weakness. PICK is a product that will reflect the world’s rising demand for industrial commodities in an inflationary environment. Pick up some PICK on the dip as the long-term trend and fundamentals continue to favor a bullish path of the sector.
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