Summary

  • Base metals decline 17.09% in Q1
  • Copper- The leader of the pack leads the way on the downside
  • All members of the sector post double-digit percentage losses
  • Iron ore and lead are the best performers
  • The BDI halves in value

Base metal prices fell by 23.43% in 2015, but in 2016 they appreciated by 26.77%. In 2017, the sector of nonferrous industrial metals was the best-performing commodities sector posting a 21.99% gain for the year. In 2018, the industrial commodities shed 15.78% of their value. In 2019, the six LME metals were 1.74% higher from the closing level at the end of December 2018. In Q1 2020, the sector plunged 17.09%. The best performing commodity in the base metals sector in Q1 was LME lead, which fell 11.23%. LME copper was 22.17% lower for the quarter, and the nearby COMEX futures contract fell 20.34%. Aluminum was 16.68% lower during the first three months of 2020, while the price of tin moved 14.78% to the downside. Nickel slumped by 19.73%. The price of zinc dropped 17.93%, and lead posted an 11.23% loss in Q1.

Meanwhile, the price of iron ore moved 9.66% lower in Q1, and the Baltic Dry Index plunged 49.72% in Q1 after dropping over 40% in Q4 2019.

Industrial commodity prices experienced a perfect bearish storm as economic activity around the world ground to a halt as the Coronavirus spread across the globe. When OPEC and Russia abandoned production quotas on March 6, the price of crude oil dropped to the lowest levels in almost two decades. Falling energy prices cause production costs to decline, allowing producers to sell at far lower levels. At the same time, wild currency volatility and uncertainty in markets across all asset classes weighed on the sector. Moreover, a deflationary spiral that began in China and spread across the world over the past three months created the most bearish conditions in the stock market and all other asset classes since the 1930s.

2020 started with optimism over trade as the US and China signed a “phase one” deal that de-escalated the trade war that had hung over industrial commodities and other markets throughout 2019. At the same time, the December 12 election in the UK paved the way for a Brexit with a deal with the EU that removed another level of uncertainty from markets. Many commodities, including base metals, hit their highs for the quarter during the early days of 2020. As the Coronavirus spread began to impact the Chinese economy, prices fell. China is the demand side of the equation for base metals, industrial commodities, and most raw materials. When the virus spread beyond China’s borders in February, prices slumped, at the end of the month and into March, the slump turned into price carnage.

Central banks around the world slashed interest rates. Monetary and fiscal stimulus programs rose to unprecedented levels throughout March. Short-term interest rates in the US fell to zero percent, and both the US Fed and ECB fired bazookas of liquidity at markets. Typically, falling interest rates are supportive of base metals and commodities prices as they lower the cost of carrying inventories. However, Q1 2020 was anything but an ordinary time in markets. The quarter ended with the number of cases of Coronaviruses and fatalities rising. Central Banks and government policies have aimed at stabilizing economies worldwide, while scientists scramble to find effective treatments and a vaccine. Healthcare systems across the globe reached the brink as professionals cared for the sick, and leaders looked to slow the spread of infections. Scientific progress is slow compared to the spread of COVID-19 and the reaction in markets. The deflationary spiral has been a symptom of the global pandemic, which is the worst since the 1918 Spanish flu that claimed fifty to one-hundred million victims. As we head into the second quarter of 2020, the world remains on edge, and markets faced the world financial crisis since the Great Depression in the 1930s. The environment was highly bearish for the prices of base metals and all industrial commodities.

The Invesco DB Base Metals product (DBB) reflects the price action in copper, zinc, and aluminum on the London Metals Exchange. The base metals tend to move together when it comes to macroeconomic issues and risk-off environments. In Q2, the global economic contraction will be the leading factor facing markets as the world looks to contain the spread of the virus. The economic legacy of Q1 2020 is likely to be a dark financial cloud hanging over the markets for years to come causing wide price variance.

Copper

The red metal posted a gain of just over 18% gain on the COMEX and 17.4% gain on the LME in 2016. In 2017, COMEX and LME copper gained 31.57% and 30.25%, respectively. Copper was trading at the highest price since 2014 at the end of 2017. Copper on the COMEX futures market moved 20.38% lower in 2018. LME copper three-month forwards lost 16.83% in 2018. In 2019, the red metal was 6.43% higher in the futures market in the US and 3.38% higher on the three-month forward market at the LME in London. Copper is the leader of the base metals sector, and it led it lower in Q1 with a loss of 20.34 % on COMEX and 22.17% on the London Metals Exchange.

Copper rose to the highest level since January 2014 when COMEX futures traded $3.3220 per pound on December 28, 2017. Copper started 2019 on a bearish note as it dropped to a new low at $2.5430 per pound on the second trading session of the year on January 3. After failing to reach the $3 per pound level in April, copper fell below the late 2018 low to $2.4675 during the week of September 3, 2019, when it put in a bullish reversal on the weekly chart. The low came after the US and Chinese trade war escalated in August. In Q4 2019, progress on trade that led to a “phase one” trade agreement pushed the price back to the $2.80 per pound level on the nearby futures contract. In early Q1, copper traded to a peak of $2.8930 when the global pandemic began to take hold of markets and worsened throughout the quarter.

Source: CQG

As the weekly chart highlights, copper had made lower highs and lower lows since June 2018 until Q1 when it broke to the downside and moved towards the $2 level on the continuous futures contract. Copper was in oversold territory on the weekly chart at the end of Q1 as the price fell below medium-term technical support at $2.4675 in March.

Source: CQG

As the daily chart shows, the now active month May COMEX copper futures contract has made lower highs and higher lows in March. Both price momentum and relative strength indicators fell below neutral readings during the final month of the quarter when the price stabilized, and the metrics turned higher.

Source: CQG

As the monthly chart illustrates, copper fell in March on the back of the escalation of Coronavirus as it spread to Europe, the United States, and over 150 countries around the world. From a technical perspective, the volume has been steady, but open interest declined as the price dropped. Risk-off conditions sent the price of copper from $4.2160 to $1.2475 in 2008, which is a red flag for the price of the red metal.

Open interest in the COMEX futures market moved from 266,891 contracts at the end of Q4 to 182,253 contracts at the end of Q1, a decline of 84,638 contracts, or 31.71% lower over the past three months. The path of least resistance will depend on progress on the scientific front when it comes to battling COVID-19 and the economic fallout from the virus around the globe.

A significant indicator of the short-term price direction of the base metal tends to be the level of LME stocks. LME stocks rose to a high of over 388,000 tons in March 2018. At the end of 2018, they stood at the 130,025-ton level. After falling to a low at 111,175 tons in mid-March 2019, stock levels were volatile and stood at the 145,700-ton level at the end of Q4 at the end of December 2019.

Source: Kitco/LME

At the end of Q1 2020, they stood at 222,225 tons, an increase of 76,525 tons or 52.52% on a quarter-to-quarter basis. The rising stockpiles weigh on the price of the red metal as they are a sign of demand destruction in China and around the world.

Source: Kitco/COMEX

Meanwhile, stocks on COMEX were at the 37,951 tons at the end of Q4 and fell to 31,651 tons at the end of Q1 2020, a decline of 6,300 tons or 16.6%. The LME has been working to improve the transparency of the inventory data as dominant market participants have a history of manipulating stocks to push prices higher or lower. Meanwhile, since a Chinese entity controls the LME after its purchase in 2013, the data could be dubious at times.

US interest short-term interest rates declined to the levels seen in the aftermath of the 2008 global financial crisis during Q1 at zero percent. Fiscal and monetary policy stimulus rose to unprecedented levels in March, but the flood of liquidity to stabilize markets is a symptom of the global pandemic and its impact on the worldwide economy. Copper is likely to continue to reflect the risk-off conditions and halt in business activity around the globe.

Volatility increased dramatically in the currency markets with wide swings in the US dollar versus euro currency pair. The dollar index traded in a wide range as the crisis unfolded, but the greenback index moved higher over the first three months of 2020. Meanwhile, the strength of the price of gold in Q3 continues to be a flashing sign that all currencies are moving lower even though the dollar continues to be the strongest foreign exchange instrument. The dollar may be the king of currencies, but gold is the monarch of money. Lower rates tend to be bullish for commodities prices over time, but these are anything but ordinary times in our lives.

The European Central Bank remains highly accommodative when it comes to monetary policy. Under the new President, Christine Lagarde, the ECB fired a 750-billion-euro cannon at the financial system in an attempt to provide stability in March. Additional monetary and fiscal policy moves are on the horizon in Q2 as the continent continues to deal with the economic and human toll of the virus. Italy and Spain have suffered a staggering death toll and the number of cases. Many countries within the EU have closed their borders to most travelers.

The UK and EU parted ways at the end of January as the December election of Prime Minister Boris Johnson paved the way for the divorce that fulfilled the will of the British people from the June 2016 referendum. The December 12 general election stood as a do-over of the referendum. The number of cases of Coronavirus in the UK continued to rise at the end of Q1, with both Prime Minister Johnson and Prince Charles, the current heir to the throne, testing positive. London is the home to the London Metals Exchange and hub of international trading for base metals and many other markets. The LME stopped all ring or floor trading in March and moved to a wholly electronic model.

Copper traded to lows of under $1.25 in 2008 in the wake of the world financial crisis. In 2000, the price of the red metal was 85 cents per pound. Before the mid-2000s, copper never traded above $1.60 per pound. Copper traded to a low of $1.9355 in January 2016, which is now the level of critical support as we head into Q2. Technical resistance is at the mid-January high of $2.8860 per pound.

Copper was in a bear market from 2011 through the beginning of 2016. After ten months of consolidation, the metal broke out to the upside, and the bear of past years had turned into a raging bull in 2017. The first half of 2018 had been a year of consolidation, but during Q3 of last year, copper broke to the downside, and the price fell to a marginally lower low in Q3 2019. Copper reversed higher on the daily chart in September and followed through on the upside in Q4 as optimism rose over a de-escalation of the trade war between the US and China. The global pandemic dealt copper and markets across all assets a dramatic blow in Q1. The path of least resistance for the price of the red metal could now be in the hands of scientists working on treatments and a vaccine. The economic fallout from the unprecedented halt in business activity could weigh on the prices of industrial commodities and base metals over the coming months and years. The decline in energy prices will lower production costs, but the virus could cause labor shortages that weigh on output. Wide price variance in the copper futures and forward market, as well as all other markets, is likely to continue in Q2 and beyond.

Nearby copper futures on COMEX settled at $2.2280 on March 31, and three-month forwards on the LME were at $4811.50 per ton.

Copper Prospects for Q2 2020

Copper’s bull market that commenced in January 2016 had been almost picture-perfect as it has never violated a technical support level on the weekly chart. The pattern held over the first six months of 2018, but in Q3, the price fell significantly, destroying the bullish trend from a technical perspective. In Q4 2018 and Q1 2019, copper worked its way to a marginal new low, which triggered a relief rally on the back of optimism over a trade agreement between the US and China. In Q2 2019, the red metal remained above the Q1 low. In Q3, the price fell to a lower low. In Q4, progress on trade lifted the price of the red metal. In Q1 2020, after rising to a marginal new high at just under $2.90 per pound, the price fell sharply on the back of the global pandemic and halt in business activity.

The path of least resistance for copper will depend on the progress of science and the duration of the crisis. The longer it takes to get the situation under control, the lower the price of the red metal could fall. It is more than a challenge to predict the future at the end of Q1, but the uncertainty of the virus and the unprecedented economic fallout could weigh on the red metal for a prolonged period.

Typically, interest rates, the level of the US dollar, and Chinese economic growth are leading factors that drive the price of copper. We are facing anything but ordinary times as we head into Q2. During the worst risk-off period since the 1930s, we are likely to see wide price ranges, and the potential for lower lows below the January 2016 support level is high.

Copper traded in a range from $4626.50 to $6325 per ton on the LME in Q1. Copper finished the quarter just above the bottom end of the range as it did on COMEX.

2020 began on an optimistic note, but the black swan event in Q1 changed the copper, base metals, all other markets, and the world in ways we will feel for years if not decades. We face a new reality in the commodities market, and copper is a barometer for the asset class.

If Coronavirus impacts production and inventories decline when business activity begins to come back online, we could wild swings on the back of the mountains of liquidity that will have a depressive effect on currencies. Fasten your seatbelts in all markets but keep an eye on copper because it could provide signals for other asset classes. In a world gripped by illness, Doctor Copper could provide clues.

Aluminum

The price of aluminum moved 12.43% higher in 2016 after falling by 18.35% in 2015. In 2017, aluminum moved 32.33% higher, but the base metal fell by 17.99% in 2018. Three-month LME aluminum forwards moved 0.92% lower over in 2019. In Q1, aluminum forwards fell 16.68%.

While trade was the critical issue for the aluminum market in 2018 and 2019, like all other markets, the halt of the global economy on the back of the worldwide pandemic weighed on the price of the nonferrous metal leading to an almost 16% decline in Q1 2020.

Aluminum inventories on the London Metals Exchange fell from 1,475,025 metric tons at the end of Q4 2019 to 1,148,750 tons at the end of Q1 2020, a decline of 326,275 tons or 22.12% after a rise of over 59% in Q4.

Source: Kitco/LME

As the one-year chart highlights, aluminum stocks flooded into LME warehouses starting in late November 2019 but fell during Q1 2020, reaching a low in late March.

Shares of Alcoa (AA) fell dramatically with weakness in the price of aluminum and risk-off conditions on the back of the global pandemic. AA shares closed 2019 at $21.51 per share and fell to $6.16 at the end of Q1, a decline of 71.36% over the past three months. AA underperformed the price action in aluminum and the stock market in Q1 as the shares reflect the deflationary spiral in the world.

Aluminum Prospects for Q2 2020

2020 began on a note of optimism as the US and China agreed on a “phase one” trade deal. However, Coronavirus and its toll on humanity and the global economy will continue to follow the aluminum market into Q2 and beyond. The potential for even lower prices is high; the price action in Alcoa shares is a warning sign for the base metal over the coming months and years.

Source: Kitco/LME

As the chart shows, despite the rise in Q4, aluminum stocks on the LME declined significantly over the past five years, which had been a supportive factor for the price of the metal. However, risk-off conditions have changed everything in all markets, and aluminum is no exception. The world’s economy ground to an unprecedented halt in March, and that situation had not changed on the final day of the quarter. A prolonged period of a global shutdown and economic contracts could push aluminum to far lower levels over the coming months. Coronavirus has created an unprecedented event in our lifetimes, and we should prepare for the same price behavior in all assets.

Three-month aluminum forwards on the LME traded in a range from $1538.50 to $1826 in Q1 and closed at the end of March at the low. Aluminum three-month forwards closed Q1 at $1524.00 per ton. The price action in AA shares could be an omen for the commodity over the coming weeks and months.

Source: Barchart

As the chart shows, AA shares traded to a price that is almost half the level seen in the late 1980s. AA shares dropped from $21.51 at the end of 2019 to $6.16 on March 31, a decline of 71.4%. Aluminum is limping into Q2, and the prospects for lower price levels are high.

Nickel

The price of three-month LME nickel, a highly volatile metal, plunged by an astonishing 42.57% in 2015 and then rallied by 15.98% in 2016. In 2017, nickel posted a gain of 21.90%. Nickel posted a 13.17% loss in 2018. Nickel moved 31.79% higher in 2019 as the market prepared for Indonesia’s export ban that started on January 1, 2020. In Q1, the price of nickel forwards on the LME posted a 19.73% decline as risk-off conditions trumped all other fundamental and technical factors.

Indonesia is a leading nickel producer. The market had expected a mineral export ban to begin in 2022. However, the government accelerated the ban, which started on January 1, 2020. The price of nickel exploded higher on the back of the export ban in Indonesia in 2019. The trend towards electric automobiles continues to underpin the nickel market. Nickel was the best-performing base metal in 2019 and the only metal to post a double-digit percentage gain for the year. Coronavirus in Q1 caused the price of nickel to implode, and that trend could continue over the coming months.

On the LME, nickel inventories rose from 150,690 at the end of Q4 2019 to 229,812 tons at the end of Q1 2020, 79,122 tons, or 52.5% higher than at the end of 2019. Nickel stocks were 27.53% lower in 2019. In 2018, LME stocks fell by over 150,000 metric tons, but the trend of falling inventories ended in Q1 2020. The Indonesian export ban and rising demand from electric vehicle batteries provide some support for the price of nickel, but the worldwide pandemic was the overriding factor for the price path of the metal in Q1.

Exchange stocks of nickel tend to be a higher grade suitable for battery production, while nickel for steelmaking requires a lower grade. These days, only around 5% of annual nickel production goes into batteries while 1% is needed for EV power plants, but that percentage is likely to fall, particularly with the significant decline in the price of crude oil and petroleum-based fuels in Q1.

When it comes to nickel, iron ore and steel demand are substantial factors for the price of the nonferrous metal. Nickel is highly sensitive to changes in global economic conditions, as we witnessed in Q1. Nickel is a very volatile metal, and we could see a wide price range for the metal in Q2, but the bias is to the downside as the global economy remains shutdown. A prolonged period of economic contraction would weigh on the price of the nonferrous metal. However, as the price declined, so will output.

Moreover, a decline in the value of currencies could cause some inflationary pressures that could boost prices down the road, but the short-term picture remains bearish. Three-month nickel forwards closed Q1 at $11,298 per ton, at the bottom end of the trading range in 2020. Demand from electric cars is supportive of the price of the nonferrous metal, but the global pandemic will continue to be the most significant issue facing all markets.

Nickel Prospects for Q2 2020

Nickel tends to be one of the most volatile metals that trade on the London Metals Exchange. Over 2017, nickel ran into selling each time the price moved above the $12,000 per ton level, which had been critical technical resistance for the base metal. $12,000 was critical resistance, but in 2018 and 2019, it had made great strides above that level. Nickel was back below $12,000 at the end of Q1 2020 as the price slumped by just under 20%.

Nickel is a thinly traded metal on the LME, and the price can swing from contango to backwardation. At the end of Q1, the cash to three-month nickel prices was at a contango of around $63 per ton, which decreased by $22 from the contango at the end of Q4 2020. Contango is a sign of supply and demand equilibrium or oversupply in a market. The Coronavirus trumped the Indonesian export ban in Q1, and the price of nickel plunged with all of the other members of the base metals sector and markets across all asset classes.

Rising inventories should also weigh on the price of nickel. Technical resistance is now at the $12,000 per ton level once again as we head into Q2.

LME nickel traded from lows of $11,142 to highs of $14,360 per ton in Q2 and closed the quarter near the low. Progress on trade with China was not bearish for all base metals, but a deflationary spiral made all other technical and fundamental factors meaningless. Eventually, a slowdown in production could cause inventories to decline, leading to a bottom. At the end of Q1, the trend remained lower in the nickel market that could be heading for the $10,000 level or lower later this year.

Lead

Lead, the worst-performing nonferrous metal in 2014, falling by 17.65%, and then it was the best performing nonferrous metal in 2015, declining by only 3.36% in 2015. In 2016 lead gained 11.14%. Lead appreciated by an incredible 25.31% in 2017. The price of lead fell 19.32% in 2018 and was 4.02% lower in 2019. In Q1, lead forwards were the best performing metal on the LME, which is not saying much. Three-month LME lead forwards was 11.23% lower and closed on March 31, 2020, at $1,718.50 per ton.

Lead is a thinly traded metal, and it is always a possibility that there are both price and stockpile manipulation in the lead market. Lead stocks on the LME were at the 66,325 level at the end of Q4 2019 and moved to 71,125 tons at the end of Q1, 4,800 tons, or 7.24% higher over the first three months of 2020. The stocks had declined by 38.29% in 2019.

Demand for batteries around the world is supportive of the price of the toxic base metal. China is, by far, the world’s largest producer and consumer of lead and the biggest player in the market, which lends the price of the metal to price manipulation. The Chinese anti-pollution policies have increased the demand for electric automobiles, which is supportive of the price of lead. There is some degree of correlation between the price of oil and lead as higher oil prices increase the demand for electric vehicles and falling oil prices do the opposite. Crude oil tanked in Q1, which weighed on lead, but the virus and risk-off conditions were the overwhelming factors pushing the price of the base metal lower. Economic contraction around the globe could continue to weigh on the price of lead in Q2 and beyond. On a longer-term basis, lead is a promising metal because of its consumption in batteries, a global market that continues to grow. However, the downside potential is substantial as we will into the second quarter of 2020.

Lead Prospects for Q2 2020

The growth in the battery market around the world, and China’s intention to increase the number of electric automobiles, is supportive of demand for and the price of lead. While the “phase one” trade deal between the US and China provided some optimism going into this year, the pandemic and economic contraction are bearish for the price of the base metal. Lead traded in a range from $1607 to $2026 in Q1 and made a new high in Q4 before correcting. Lead closed below the midpoint of its 2020 trading range at the end of March.

Liquidity in the lead market is thin, but the metal has had an expanding addressable market. The price carnage in the oil market and deflationary spiral are not supportive of the price of lead forwards on the LME as we head into Q2. OPEC’s decision to flood the world with crude oil at a time when Coronavirus was spreading like wildfire exacerbated the price carnage in markets, and lead was not immune.

Zinc

The price of zinc dropped by 25.8% lower in 2015. Zinc was the best-performing metal on the LME in 2016, gaining 59.53%. Zinc added to those gains as it rallied by 27.54% in 2017. Zinc moved 25.49% lower in 2018 and was 6.53% lower in 2019. In Q1, the price of zinc declined by 17.93%. Three-month zinc forwards on the LME closed at $1,879.50 per ton on March 31, 2020. After achieving a multiyear high in February 2018, the price of zinc moved steadily lower on the back of increasing stockpiles, and weak Chinese demand. Supplies of zinc concentrates have been rising because of high prices last year. New production from China and Peru weighed on the price of zinc, and lower demand because of escalating trade tensions had sent prices significantly lower. The zinc market had been tight because of depleted mine supply, but higher prices brought new production to the market, and the $2500 per ton level, which has become a significant pivot point for the metal gave way. In Q1, the global pandemic sent the price below $2000 per ton, which was a level of technical and psychological support. LME stocks moved higher in Q1. LME inventories rose from 51,225 at the end of Q4 to 73,125 tons on March 31, an increase of 42.75%. Zinc inventories had declined significantly over the past two years, but they rose during the first quarter of 2020. The fundamentals for zinc shifted with new production at higher prices, and we witnessed a shift in the production and pricing cycles in the zinc market. Coronavirus hit all of the base metals in Q1, and the zinc market was no exception.

Zinc Prospects for Q2 2020

As the production cycle for the zinc market shifted because of higher prices, more zinc concentrates came onto the market, which depressed the price of the metal before the global pandemic dealt all of the base metals a bearish blow. We witnessed the first significant increases in stockpiles in Q2 2019 as they almost doubled in the on a quarter-to-quarter basis. In Q1 2020, inventories rose significantly. Zinc traded in a range from $1793 to $2449 Q1 and closed close to the bottom end of the price band. Economic contraction around the world is likely to continue to weigh on the price of zinc as we move into the second quarter of 2020.

Tin

Tin is the most volatile and illiquid metal traded on the LME. Tin declined 25.13% in 2015. In 2016, tin was the second-best performing base metal, rising by 44.10%. In 2017, tin was the only loser in the base metals sector posting a 5.4% loss. Tin fell 1.89% in 2018, making it the best performer of the six base metals that trade on the LME. In 2019, the price of tin moved 13.26% lower. In Q1, tin added to the losses with a decline of 14.78%. Tin was the worst-performing base metal on the LME, and the only one to post a double-digit percentage loss in 2019. In Q1, tin was the second-best performer, but the price still declined by almost 15%.

China is the world’s largest producer and consumer of tin. Indonesian output is on the decline, but in other areas of the world, it has risen. Above $20,000 per ton, things got dicey for tin throughout 2017, but economic growth in China provided stability and support for the price. The $20,000 had become the pivot point for the price of three-month tin forwards. In 2019, the price moved away from the level on the downside. In Q1, tin dropped below the $15,000 level. Stocks on the LME moved lower in Q1; they were at the 6,245-ton level, down 865 tons as of March 31. Three-month tin forwards on the LME closed at $14,360 per ton on the final day of March.

Tin Prospects for Q2 2020

Tin is a thin market that makes the metal susceptible to wide price swings. When it comes to tin, it tends to move on supply and demand fundamentals because of the lack of speculative interest. Tin was in a small backwardation of $41 per ton when it comes to cash to three-month forwards on the LME. The back widened by only $11 per ton since the end of 2019. I suggest monitoring the supply and demand situation in the tin market by watching and paying close attention to the tin spreads. Tin can swing back and forth between contango and backwardation, and those moves tend to impact the path of least resistance for three-month prices. Tin can be a heavily manipulated market on the LME because of the limited liquidity. Tin traded in a range from $13,375 to $17,775 in Q1 and closed near the bottom end of the trading band.

The bottom line: Outlook for Q2 2020

Base metals and industrial commodities are heading into the second quarter of 2020 under an umbrella of the worst economic conditions since the 1930s. The world was at war with an invisible and microscopic enemy at the end of Q1. The virus does not discriminate because of nationality and borders, race, religion, wealth, sexual orientation, or political ideology. Coronavirus is a reminder that all of the people on the planet are in the same boat when it comes to battling a health emergency. The impact on markets has been dramatic, but it is only a symptom of the global pandemic. Central banks and leaders can treat the effects of the virus, but the answer to the crisis is in the hands of scientists looking for effective treatments and a cure and the health professionals who are selflessly treating the ill. The global supply chain continues to provide essentials to people around the globe, but the economic fallout will be substantial. The longer the virus remains out of control and spreads around the planet like wildfire, the higher the financial cost. However, life comes first, and the economic factors a distant second.

At the end of Q4 2019, I wrote, “Any risk-off period during 2020 has the potential to cause selling in this sector of the commodities market.” No one expected a risk-off period caused by a virus, which has become the most significant black swan event of our lifetime. Fundamentals and technical factors will continue to take a backseat to the progression of the virus in the short-term. However, price cycles will eventually lead to price bottoms. As production grinds to a halt in an environment of collapsing prices, inventories will begin to fall, leading to price bottoms. The world will emerge from the ashes of Coronavirus, and base metals are the building blocks of infrastructure.

Keep a critical eye on LME stock movements as the trend in inventories can provide some clues about the path of least resistance of prices. Throughout the years, we witnessed many examples where stocks pushed prices around. However, always view inventories with a grain of salt as they can create a mirage when it comes to the path of least resistance of prices. The LME announced that it is working towards a plan that would increase transparency when it comes to stockpile data over the coming months. However, as a Chinese entity owns the exchange, the potential for manipulation is always a danger.

Each non-ferrous metal traded on the London Metal Exchange has different supply and demand fundamentals. Some of the metals were in deficit, and some had surplus inventories when the pandemic emerged.

The price of iron ore, the main ingredient in steel, moved 3.55% lower in 2018, after a 10.02% loss in 2017. In 2019, the price of iron ore jumped 32.27% higher on the back of supply shortages from Brazil. In Q1, nearby iron ore futures fell 9.66%. Nearby iron ore futures finished Q1 at $82.69 per ton. Iron ore is the primary ingredient in the production of steel. U.S. Steel (NYSE: X) stock was trading at $6.31 per share compared to $11.41 at the end Q4; the stock almost halved in value in Q1. X shares had lagged the stock market in 2019 and continued to underperform the leading indices during the price carnage in late February and March 2020.

The Baltic Dry Index moved 42.14% higher in 2017. In 2018, the BDI experienced a 6.95% loss compared to its closing price at the end of 2017 and was 14.24% lower in 2019. In Q1, the BDI fell 49.72%. Even though the BDI experienced seasonal weakness during the winter months, the deflationary spiral and halt of economic activity weighed on the BDI and freight rates at the end of Q1. The index that represents the freight rates for shipping dry bulk commodities around the world is often a sign of demand for commodities. China is the most influential factor when it comes to moves in the BDI as it is the 800-pound gorilla when it comes to the demand side of the fundamental equation in the raw materials market. New restrictions on cleaner fuels boosted shipping rates and the BDI in 2019. The BDI closed Q1 at the 548 level. The level of the BDI reflects the conditions created by the global pandemic.

The global pandemic has changed the world from a short-term perspective, but the impact will last long after scientists discover effective treatments and a vaccine. The bottom line for base metals and other commodities is that we will feel the effect for years to come. While the deflationary spiral is bearish for prices, unprecedented levels of fiscal and monetary policy stimulus could cause inflationary pressures. At the same time, as the contraction leads to lower levels of output of all of the base metals, inventories will decline, and prices should find bottoms. We could be in for very volatile price action for the foreseeable future. As we head into Q2, the downward spiral in prices continued.

Source: Barchart

DBB is the ETF product that tracks the base metals sector. DBB moved from $14.94 at the end of Q4 2019 to $12.35 at the end of Q1 2020. DBB fell by 17.34%. The product did an excellent job reflecting the losses in the copper, aluminum, and zinc markets in Q1. DBB does not list lead, nickel, or tin LME forwards in its top holdings, and the prospectus says, “The index Commodities consists of aluminum, zinc, and copper-Grade A.”

DBB has net assets of $101.42 million, trades an average of 109,490 shares each day, and charges a 0.75% expense ratio. The net assets and average trading volume fell from the level at the end of Q4 2019.

Expect lots of price volatility in the base metals and industrial commodity sector of the commodity market over the coming quarter and beyond. While economic contraction is bearish for prices, and we are likely to see lower levels, inflationary policies to combat the financial symptoms of the pandemic and a significant decline in production could give way to lots of two-way price volatility. Keep those stops tight and take profits when they are on the table. Markets rarely move in a straight line, which creates an environment where trading opportunities to increase. The current market conditions favor trading rather than any medium or long-term positions.

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.