- Base metals decline 1.56% in Q4 but were still 1.74% higher in 2019
- Nickel falls the most in Q4 but was still the leader for 2019
- Copper was the best-performing base metal in Q4
- Aluminum and tin move to the upside while nickel, lead, and zinc prices decline
- Iron falls 0.77% in Q4, and the BDI plunged by over 41%
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.
The base metals sector dropped 8.14% in Q2 after a 10.77% rise in Q1 for this year. In Q3, the sector rose by 2.71% on the back of an over 36% gain in the price of nickel forwards on the LME. In Q4, the sector fell by 1.56% on the back of an almost 19% decline in the price of nickel. In 2019, the six LME metals were 1.74% higher from the closing level at the end of December 2018. The best performing commodity in the base metals sector in Q4 was COMEX copper, which rose 8.47%. LME copper was 7.35% higher for the quarter. Aluminum was 6.24% higher during the final three months of 2019, while the price of tin rose 4.85%. Nickel corrected 18.97% to the downside but still managed to post an almost 32% gain for 2019. The price of lead slumped 7.50%, and zinc fell 1.36% in Q4.
Meanwhile, the price of iron ore moved 10.77% lower in Q4 but was still over 32% higher in 2019. The Baltic Dry Index plunged 41.30% in Q4 and finished the year lower than at the end of 2018 by 14.24%. In 2019, nickel led the pack with a 31.79% gain, followed by COMEX copper, which was 6.43% higher. LME copper rose 3.38% in 2019. Lead, and zinc prices fell by 4.02% and 6.53% respectively for the year, while tin posted 1 13.26% loss. The price of aluminum slipped by 0.92% in 2019.
Most base metal prices experienced selling pressure on the escalation in the trade dispute throughout 2019. In Q4, the “phase one” trade deal provided some hope that the global economy will grow in 2020, and Chinese growth will stabilize during the year that began on January 1. In Q4, the dollar index fell by 2.99%, but some marginal strength in the U.S. dollar index, which moved 0.34% higher in 2019, could have weighed on prices. Optimism over a trade deal with China had been changing places with pessimism throughout the year, adding to price volatility in the industrial commodities sector. The divisions within the US branches of government make it impossible to move forward with any infrastructure legislation until after the November 2020 election.
China is the demand side of the fundamental equation in the commodities asset class because of their massive population and economic growth. The trade dispute escalated in early August when US President Trump slapped new tariffs on China, and the Chinese retaliated. However, in mid-September, some optimism returned, which lifted some prices. Copper, the leader of the base metals sector, fell to a new low in early August but recovered when some confidence returned to the market. On December 13, the announcement that China and the US agreed to terms for a “phase one” trade deal lifted the price of copper to the $2.80 per pound level on the nearby COMEX futures contract. The red metal, which is a leader for the industrial commodities sector, broke out to the upside but did not experience a significant move.
Tariffs distort supply and demand fundamentals in all commodities, and the industrial sector of the market is a focal point. As we head into 2020, the trade issues and path of least resistance of the U.S. dollar are likely to continue to provide direction for these industrial commodities that are the building blocks for infrastructure around the globe. A comprehensive trade deal between the US and China is in the best interest of both nations. China needs a deal from an economic perspective as its economy is suffering the most in the current environment of protectionism. With the 2020 election on the horizon, the “phase one” deal is a political victory for President Trump as it fulfills a campaign promise from the 2016 election, where he pledged to level the playing field on trade with the Chinese. Since the deal moves the needle slightly in the direction of the US, the President can claim victory as he campaigns for reelection in what is looking like a hostile political environment following his impeachment by the House of Representatives on December 18. I continue to believe that the worst in the trade dispute is behind us when it comes to the increase in protectionist policies that hit the markets in August. Time will tell if the Chinese and US administration can reach common ground and achieve a comprehensive deal. Meanwhile, the US Fed’s pivot towards accommodative monetary policy and lower interest rates around the globe are supportive of the base metals sector as lower interest rates lower the cost of carrying inventories.
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 like trade. In 2020, global economic growth or contraction and the direction of the US dollar are likely to determine the path of least resistance of industrial commodities prices.
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% last year. In Q1 2019, COMEX copper futures rebounded by 11.7% while LME forwards moved 8.3% higher. In Q2, copper continued to decline as it lost 7.85% on COMEX and 7.64% on the LME. In Q3, the COMEX futures fell by 4.69%, while LME three-month copper shed 3.71% of its value. In Q4, COMEX copper was 8.47% higher, and LME copper gained 7.35%. 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 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, 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.
As the weekly chart highlights, copper has made lower highs and lower lows since June 2018. To break that pattern, the red metal would need to move above $3 per pound. Copper was in overbought territory on the weekly chart at the end of Q4 as the price rose above medium-term technical resistance at $2.7930 in December.
As the daily chart shows, the now active month March COMEX copper futures contract has made higher lows and higher highs since the early September low. Both price momentum and relative strength indicators rose to overbought conditions and crossed lower in late December.
As the monthly chart illustrates, copper is attempting to recover with gains over three of the past four months. In November, the red metal only declined by one tick from the previous month’s closing level. From a technical perspective, volume and open interest have been steady as copper price momentum and relative strength indicators were on either side of neutral readings at the end of Q4. Price momentum crossed higher in a bullish sign for the base metal.
Open interest in the COMEX futures market moved from 234,768 contracts at the end of Q3 to 266,891 contracts at the end of Q4, a rise of 32,123 contracts, or 13.68% higher over the past three months. The path of least resistance will depend on the Chinese economy, which hinges on the progress of trade negotiations with the United States.
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, stocks moved higher as metal came into LME warehouses and rose to 264,425 tons at the end of Q3.
At the end of Q4, they stood at 145,700 tons, a decline of 118,725 tons or 44.90% on a quarter-to-quarter basis. The falling stockpiles are supporting the price of the red metal as they are a sign of demand in China, the world’s leading consumer of copper.
Meanwhile, stocks on COMEX were at the 39,719 tons at the end of Q3 and fell to 37,951 tons at the end of Q4, a decline of 1,768 tons or 4.45%,. The LME is 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. However, it removed daily stock data from its website on January 1, which limits transparency.
At the June Fed meeting, the US central bank told markets that US rates would move lower by the end of 2019. On July 31, the Fed cut rates by 25-basis points for the first time in years. At the same time, the central bank ended its program of balance sheet normalization that had been pushing rates higher further out along the yield curve. In September, the ECB cut rates by the basis points to negative 50 points. The Fed followed with another 25-point reduction in the Fed Funds rate on September 18, and another in October for a total of 75 basis points in 2019. At its December meeting, the Us central bank left rates unchanged. As 2020 is an election year in the US, the Fed is likely to leave rates at the current level until at least next November. The central bank is apolitical and will avoid influencing the election with any monetary policy changes unless absolutely necessary.
The moves by the Fed and ECB are likely supportive of commodities prices when it comes to lower rates, which decreases the cost of carrying long positions or inventories. Meanwhile, since the Fed has been moving slowly when it comes to rate cuts, the dollar has been stable. In Q4, the dollar index declined but was marginally higher at the end of 2019 compared to at the end of 2018. Given the inverse relationship between the dollar and commodities prices, a stronger dollar on the year was not supportive of the price of copper. Meanwhile, the rally in the price of gold in Q3 was a 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 as emerged as the monarch of money. Lower rates tend to be bullish for commodities prices over time.
The European Central Bank remains highly accommodative when it comes to monetary policy. Short-term rates at negative fifty basis points are stimulative, along with a return of QE to the tune of 20 billion euros per month that began in November. The sluggish economic growth in Europe means that rates will remain low and the balance sheet at an elevated level for as far as the eye can see on the other side of the Atlantic.
The December 12 election in the UK paved the way for Brexit with an agreement. Prime Minister Boris Johnson won an impressive victory in the contest, and the Parliament should agree to his proposal in the coming weeks. The deadline for Brexit is now January 30. Brexit could change the future complexion of Europe, but the agreement will likely make a transition smoother than a hard Brexit would have. The election removed some of the uncertainty facing markets since the June 2016 referendum.
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 and had not looked back until Q3 of 2018. The technical resistance level for the red metal is now at $3.00 as we move into 2020, and then at $3.3220 on the continuous COMEX futures contract, the December 2017 high. Critical support is at $2.4675, the Q3 low. Little has changed from a long-term technical perspective since the end of 2018, but the path of least resistance for the price of the red metal continues to hinge on whether protectionism continues. A comprehensive trade deal between the US and China could ignite a significant rally in the copper market. In December, Stanley Druckenmiller told Bloomberg that he is long copper and bullish for the red metal in 2020.
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 stocks on the LME fell and the trade war de-escalated in Q4, the prospects for copper are bullish going into 2020.
Nearby copper futures on COMEX settled at $2.7970 on December 31, and three-month forwards on the LME were at $6182 per ton.
Copper Prospects for Q1 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, 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.
The path of least resistance for copper will demand on trade in 2020 as the red metal is one of the leading barometers for the negotiations between the US and China. Copper moved lower after the trade dispute escalated in early August as the US and Chinese exchanged new protectionist measures. Volatility will likely increase if the optimism and pessimism over an agreement swing back and forth in 2020. However, progress on trade could send the price back over the $3 level.
From an economic perspective, the Chinese economy needs a comprehensive trade deal with the US. From a political perspective, President Trump achieved a victory that he can carry into his 2020 reelection campaign with the “phase one” deal. On the campaign trail in 2016, he pledged to level the playing field on trade, and moving the needle, even slightly, amounts to a win for the US President. A trade deal has the potential to launch copper, but any disappointment and frustration would likely take the nonferrous metal the other way and could send it towards the $2 per pound level as the global economy would suffer under the effects of a prolonged trade war. Lower interest rates in the US and a weaker dollar would be bullish for the price of the metal. While rates have declined, the dollar continued to sit not far from the 2019 highs making the landscape confusing. Falling inventories and the price action were bullish at the end of 2019. Trade between the US and China will continue to be the deciding factor when it comes to the price direction.
Copper traded in a range from $5560 to $6532 per ton on the LME in 2019 and did not move outside the price band in Q4. Copper finished the quarter above the midpoint of the range as it did on COMEX.
I will be keeping my eyes on the dollar, LME and COMEX stocks, and progress on trade, which are the variables for an equation that will contribute to the path of least resistance for the price of the nonferrous metal. I believe that Stanley Druckenmiller will be correct, and we will see higher copper prices in 2020.
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. In Q1, the price of aluminum rose by just 3.63%. In Q2, aluminum moved to the downside with the other members of the base metals sector, as it posted a decline of 6.27%. In Q3, aluminum forwards posted a 3.99% loss. In the final quarter of 2019, aluminum rose by 6.24%. Three-month LME aluminum forwards moved 0.92% lower over in 2019.
The new USMCA that replaced NAFTA removed the 10% tariffs on aluminum and steel imports into the United States from Canada and Mexico in Q2. Mexico and Canada approved the new trade agreement. In December, the US House of Representatives voted in favor of the trade deal one day after it impeached President Trump on two articles. Global production has slumped, but so has demand for the metal. A comprehensive agreement on trade between the US and China would likely lift the price of aluminum forwards on the LME.
Aluminum inventories on the London Metals Exchange rose from 927,475 metric tons at the end of Q3 to 1,475,025 tons at the end of Q4, a rise of 547,550 tons or 59.04%. In 2019, aluminum stockpiles rose from 1,267,125 tons at the end of 2018 for a total of 207,900 tons or 22.4%. Stocks dropped from May through September and came storming back.
As the one-year chart highlights, aluminum stocks flooded into LME warehouses starting in late November. LME prices were lower in 2019 because of concerns over the global economy.
Shares of Alcoa (AA) almost doubled in value in 2017. In Q4, the lower price of aluminum, trade issues, and a weak stock market pushed the stock from its Q3 closing level at $40.40 to $26.58, down 34.21% over the final three months of 2018. In Q1, AA stock recovered marginally with the stock market and the price of aluminum and closed on March 29, 2019, at $28.16 per share, just 5.9% higher. In Q2, AA shares closed on June 28 at $23.41 or 16.9% lower. In Q3, AA shares moved lower again to $20.07, down 14.3% for the quarter. A rise in the stock market caused AA shares to move higher to $21.51 at the end of 2019, an increase of 7.17%. AA marginally outperformed the price action in aluminum in Q4.
Aluminum Prospects for Q1 2020
The decline in production from China as the country moves to clean the air and environment and sanctions on Russia did little ignite the price of aluminum in 2018 or 2019.
In recent quarterly reports, I wrote, “Politics will continue to play a significant role in the path of least resistance for aluminum in 2019. The tariffs issue has placed the aluminum market on the front lines. A trade war could cause wild swings in the price of the metal, but it could also result in a risk-off period in markets across all asset classes. During risk-off periods, the prices of all assets decline, and aluminum is likely to be no exception. I believe that an eventual trade deal with China will ignite economic growth around the world, and any sell-off in the aluminum market on the back of new deals and compromise will be a buying opportunity. It is likely that we will continue to see lots of volatility in the price of aluminum in 2019.” My view has not changed as we head into 2020. Now that the protectionist pressures are off Mexico and Canada, and there is progress on trade with China, aluminum could head higher in 2020.
As the chart shows, despite the rise in Q4, aluminum stocks on the LME declined significantly over the past five years, which is a supportive factor for the price of the metal. I believe that the downside is limited in the aluminum market, and the potential for a rally in 2020 has increased with the “phase one” trade deal between the US and China. Falling interest rates in the US and low rates around the world are supportive of the price of the nonferrous metal. Meanwhile, President Trump slapped tariffs on Brazilian and Argentine exports of aluminum and steel to the US, which could cause price distortions. The Trump Administration objects to currency devaluations in the South American nations, which have made their aluminum exports more competitive in global markets. At the same time, the US election could cause volatility in the aluminum market. The Democrats are likely to include the “Green New Deal” in their platform as they challenge President Trump in the November 2020 election. The initiative would increase regulations and could cause volatility in the aluminum market.
Three-month aluminum forwards on the LME traded in a range from $1710 to $1944 in 2019, with a marginal new low coming in Q4. Aluminum three-month forwards closed Q4 at $1829 per ton. I would be a buyer of aluminum on dips. A trade deal with China could ignite the price of aluminum and shares of aluminum producers like AA, which was trading at a very low level at the end of Q4.
As the chart shows, AA shares are at a level that is in the buying zone for those who believe that the price of aluminum will rebound.
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. In Q1, nickel was the best-performing base metal, as it appreciated by 22.8%. In Q2, nickel was again the leading performer as it only fell 3.13%. In Q3, the trend continued as nickel rose by 36.72%. In Q4, gravity hit the nickel forward market as it slumped by 18.97%. However, nickel was 31.79% higher in 2019.
Indonesia is the world’s leading nickel producer. The market had expected a mineral export ban to begin in 2022. However, the government accelerated the ban, which now starts on January 1, 2020. The price of nickel exploded higher on the back of the export ban in Indonesia. 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.
On the LME, nickel stocks fell from 207,924 tons at the end of Q4 to 182,574 tons on March 29, down 25,350 tons or 12.2% in Q1. Nickel inventories continued to decline in Q2 and were at the 164,718-ton level on June 28, down 9.8% for the quarter. At the end of Q3, inventories on the LME stood at 157,986 tons, 6,732 or 4.1% lower than at the end of Q2. In Q4, nickel inventories declined to 150,690, 7,296 tons, or 4.62% lower than at the end of Q3. However, nickel stocks had dropped far lower, but metal flowed into warehouses in December. Nickel stocks were 27.53% lower in 2019. In 2018, LME stocks fell by over 150,000 metric tons, and the trend continued in 2019. At the end of 2018, I wrote, “The significant move lower in inventories did not stem the price slide in the nickel market during the second half of 2018. While ore supply will likely increase because of supplies from Indonesia, rising demand from electric vehicle batteries is a reason for the drawdown in stocks. 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 required for EV power plants, but that percentage is likely to rise, particularly with the increase in the price of crude oil and petroleum-based fuels.” The stock declines provided support for the price of nickel, but the acceleration of the Indonesian export ban lit a bullish fuse under the market that took the price over 31% higher in 2019.
When it comes to nickel, keep an eye on iron ore and steel demand over the months ahead. Nickel is likely to be highly sensitive to changes in global economic conditions. However, Indonesia will remain the leading issue in 2020. Russia is a significant producer of the metal, and sanctions against the Putin government are likely to continue to cause some dislocations in the nickel market in the coming months. Nickel is a very volatile metal, and we could see a wide price range for the metal in 2020. Three-month nickel forwards closed Q4 at $14,075 per ton, just below the midpoint of its trading range for 2019. A continuation of demand from electric cars is supportive of the price of the nonferrous metal. Indonesia made the price move parabolic earlier in the year.
Nickel Prospects for Q1 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 it had made great strides above that level. Nickel broke down below that level during the final three months of last year, but it moved back above the price, which was a pivot point in Q1. The price closed at over that level in Q2 and took off on the upside in Q3. In Q4, the price pulled back, but it managed a significant gain in the year that ended on December 31.
In the late 1980s, Russian delivery and production problems caused the price of nickel to move higher; it ran to north of $20,000 per ton violently. Any rally in nickel will likely occur in the nearby forward contracts, and a large backwardation where nearby prices move quickly higher and deferred nickel contracts remain lower will develop. At the end of Q4, the cash to three-month nickel prices were at a contango of around $85 per ton, which decreased by $275 from the backwardation at the end of Q3, indicating that the prospects for a supply shortage in the nickel market eased during Q4.
Dislocation in steel and other industrial metals could increase price volatility in the nickel market. Keep an eye on those nickel stocks on the LME. At the end of Q4 2018, I wrote, “While falling inventories did not provide support in Q4, a further decline in 2019 could cause buying and upward pressure on the price of the nonferrous metal that trades with limited liquidity.” Stocks supported the price so far this year as the Indonesian ban that started on January 1, 2020.
LME nickel traded from lows of $10,525 to highs of $18,450 per ton in 2019 and did not move outside of that range in Q4. Progress on trade with China is not bearish for all base metals. Meanwhile, the issue facing supplies from Indonesia should continue to be the primary driver of the price of nickel in 2020. Indonesian nickel output is around twice that of the world’s second-leading producer, the Philippines. In the nickel market, all other factors will continue to take a backseat to Indonesia.
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. Lead was the worst-performing base metal in Q1 as it only gained 0.74% for the quarter. In Q2, lead dropped by 5.27%. In Q3, the price of lead reversed and posted an 8.73% gain. In Q4, lead moved to the downside as it posted a 7.50% loss. Lead was 4.02% lower in 2019. Three-month LME lead closed on December 31, 2018, at $1,936 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 78,750 tons, down 28,725 tons on a quarter-by-quarter basis in Q1. Inventories were at 66,175 tons at the end of Q2, down another 12,575 tons or 16%. At the end of Q3, inventories were at 69,650 tons, an increase of 3,475 tons, or 5.25%. At the end of December, lead stocks at the 66,325 level were 3,325 tons or 4.77% lower over the three months. The stocks 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. Economic weakness in China on the back of the trade dispute and escalation of protectionist policies in August was bearish for the price of the metal. The “phase one” trade agreement in December did little to lift the price of lead forwards in December. On a longer-term basis, lead is a promising metal because of its consumption in batteries, a global market that continues to grow.
Lead Prospects for Q1 2020
Given the growth in the battery market around the world, and China’s intention to increase the number of electric automobiles, I believe the prospects for an increase in the price of lead are high once economic conditions improve. A comprehensive trade deal with China could cause a rebound in the price of the metal. My target for the toxic nonferrous metal remains at $2800 per ton despite the poor performance, which is over 44% above the current price of the metal. I am friendly to the price of lead as it is likely that increasing demand will cause stocks to continue to decline, providing fundamental support. However, any risk-off periods in markets because of trade issues could trigger selling in all base metals, as we witnessed at times in 2019. Trade was a risk-off issue for the base metals sector during the second half of 2018 and the second quarter of 2019. Lead traded in a range from $1787.50 to $2241 in 2019 and made a new high in Q4 before correcting. Lead closed 2019 below the midpoint of its trading range for the year.
Liquidity in the lead market is thin, but the metal has an expanding addressable market, which may limit the downside when it comes to the price of the metal in 2020. Meanwhile, lead is likely to continue to reflect the ups and downs of the Chinese economy as well as the demand for batteries around the world.
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, making it the worst-performing base metal of the year. In Q1, the price of zinc rose by 18.98%. In Q2, the nonferrous metal gave back almost all of its gains as the price dropped 14.41%, making zinc the worst-performing base metal for the quarter. The price of zinc continued to slip in Q3 as it was 6.95% lower over the three months. In Q4, zinc forwards posted a 1.36% loss. Zinc was 6.53% lower in 2019. Three-month zinc forwards on the LME closed at $2,290 per ton on December 31, 2019. After achieving a multiyear high in February 2018, the price of zinc plunged in Q2 and Q3 of 2018 on a combination of increasing stockpiles, and weak Chinese demand. Supplies of zinc concentrates have been rising because of high prices last year, and that trend is likely to continue. 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 price climbed back above the pivot point, in Q2, it was just below that level. In Q3, the price moved below the midpoint level, and in Q4, it remained below. LME stocks moved lower in Q3. LME inventories declined from 67,300 at the end of Q3 to 51,225 tons on December 31, a decrease of 23.89%. Zinc inventories have declined significantly over the past two years. The fundamentals for zinc have shifted with new production at higher prices, and we have witnessed a shift in the production and pricing cycles in the zinc market. The price of zinc is likely to follow the stock level and the Chinese economy in 2020.
Zinc Prospects for Q1 2020
As the production cycle for the zinc market shifted because of higher prices, more zinc concentrates have come onto the market, which has depressed the price of the metal. We witnessed the first significant increases in stockpiles in Q2 as they almost doubled in the on a quarter-to-quarter basis. However, in Q3, they fell by 30.6% and by 23.89% in Q4. $2500 per ton continues to be a pivot point for the zinc market on the LME, and the price closed below that level. Zinc traded in a range from $2201.50 to $2948 in 2019, and while it flirted with the bottom of the range in Q4, it did not fall to a lower low. Economic growth in China could send the price higher, but increased production could put a cap on any rallies. Zinc has been another metal in the crosshairs of the trade war as we head into 2020. A comprehensive agreement that boosts Chinese economic growth would be bullish for zinc, but the current production levels mean that the price is not likely to run away on the upside.
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 Q1, the price of tin rose by 10.17%, and in Q2, it gave that all back and more as the price dropped by 12.15%. The price of tin continued to fall in Q3, posting a 14.52% loss for the quarter. In Q4, tin rebounded by 4.85%, leaving the tin market 13.26% lower in 2019. Tin was the worst-performing base metal on the LME, and the only one to post a double-digit percentage loss in 2019.
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. Stocks on the LME moved higher in Q4; they were at the 7,110-ton level, up 255 tons as of December 31. Three-month tin forwards on the LME closed at $16,850 per ton on the final day of December. Tin traded in a range from $15,630 to $21,675 in 2019 and did not move outside of the band in Q4.
Tin Prospects for Q1 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 $30 per ton when it comes to cash to three-month forwards on the LME. 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.
The bottom line: Outlook for Q1 2020
Base metals and industrial commodities are looking better heading into 2020 on the back of the “phase one” trade agreement between the US and China in mid-December. Lower interest rates in the US, a continuation of stimulus in Europe, and Chinese devaluation of the yuan are all bullish for the prices of the industrial metals and ores. If lower US rates cause the dollar index to decline, that would add another supportive factor to the picture. However, the reason for the stimulus is at least partially because of protectionist trade policies. Since China is the demand side of the equation for the base metals, a slowdown in the Chinese economy is a bearish factor for the sector. A comprehensive trade deal would likely light a bullish fuse, as would a rise in inflation. However, economic weakness and fears of a global recession are bearish for the sector. We are heading into 2020 with increased optimism based on progress on trade, but that could change based on the ongoing negotiations.
Any risk-off period during 2020 has the potential to cause selling in this sector of the commodities market. The prices of the base metals reflect a bit more optimism at the end of the year as the price of its leader, copper, posted a significant gain in Q4. When it comes to the performance for the year, nickel’s over 31% gain caused the sector to move 1.74% higher since the end of 2018. Were it not for nickel; base metals would have posted a decline.
When it comes to fundamentals, keep track of LME stock movements as the trend in inventories can be the best guide for the path of least resistance of prices. Throughout the year, 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. I was surprised to see no warehouse stock data on their website on January 1.
Each non-ferrous metal traded on the London Metal Exchange has different supply and demand fundamentals. Some of the metals are in deficit, and some have surplus inventories. On a macroeconomic basis, these strategic metals are all essential building blocks of infrastructure, and as such, China is the number one consumer across the board. Meanwhile, the prospects for infrastructure building in the United States, if the administration and the Democratic majority in the House of Representatives can come together in a bipartisan effort on a piece of infrastructure rebuilding legislation, would provide additional demand for the sector which could support prices gains. However, the current environment of political divisiveness and impeachment of President Trump in December makes that scenario a fantasy until at least the November 2020 election. The upcoming Presidential contest means that the two parties will continue to oppose any initiatives from the other side of the political spectrum. Any bipartisan efforts on infrastructure will have to wait until 2021 in all likelihood.
The price of iron ore, the main ingredient in steel, moved 3.55% lower in 2018, after a 10.02% loss in 2017. In Q1, iron ore exploded 24.81% higher on the back of a production problem in Brazil, where a dam collapsed and stopped output at one of the world’s leading iron ore mines. In Q2, supply concerns continued to cause the price to rally as it gained another 30.72%. In Q3, it corrected by 18.30%. In Q4, the price moved 0.77% lower but was still 32.27% higher in 2019. Nearby iron ore futures finished Q4 at $91.53 per ton. Iron ore is the primary ingredient in the production of steel. We could see lots of price volatility in the steel market in 2020 as the commodity is ground zero for some of the protectionist policies. U.S. Steel (NYSE: X) stock was trading at $11.41 per share compared to $11.55 at the end Q3; the stock was down 1.21% per share in Q4 despite significant gains in the stock market. The company issued an earnings warning in late December, which weighed on the price of its shares. On a quarterly basis, the tariffs have done nothing to bolster the price of X shares, which tanked in Q4, experienced a small rebound in Q1, and tanked again in Q2 and Q3, and only posted a marginal loss in Q4. X trades at a very low 3.14 P/E ratio making it a cheap stock. X call options limit the risk of the volatile stock. The shares were paying a 1.75% dividend at the end of Q4.
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. In Q1, which is a seasonally weak time of the year for shipping, the index fell by 45.55%. In Q2, the BDI rose by 93.64%. In Q3, it rose by 38.58%. The return of the winter in Q4 sent the BDI 41.30% lower and was 14.24% lower in 2019. 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 during the year. The BDI closed Q4 at the 1,090 level. The BDI could be highly sensitive to the trade issues over the coming months. However, we are coming into a time of the year where the shipping index tends to rise as freight activity decreases during the winter months in the northern hemisphere and increases as the spring season approaches.
Many issues face the industrial commodities sector of the raw material market that could cause lots of price volatility in 2020. The dollar, interest rates, and, most of all, protectionist policies will determine the path of least resistance of prices. A recessionary environment would weigh on the prices of industrial commodities. While economic growth in the US is a supportive factor, China is slowing, and growth in Europe is sluggish, at best. The most significant variable continues to be the trade issue as we head into the coming decade. The news cycle will have lots of influence on LME metals and other industrial commodities, along with markets across all asset classes. I continue to believe that the US and China will arrive at a comprehensive trade deal. China needs one for economic reasons, and President Trump needs political victories going into the 2020 election season after the House impeached him on December 18.
DBB is the ETF product that tracks the base metals sector. DBB moved from $14.77 at the end of Q3 to $14.94 at the end of Q4. DBB rose by 1.15%. Since DBB does not hold any long positions in nickel, it did not weigh on the value of the ETF in Q4. The prices of copper and aluminum rose, while zinc edged lower in the final quarter of 2019. 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 $119.20 million, trades an average of 109,682 shares each day, and charges a 0.75% expense ratio.
Expect a continuation of price volatility in the industrial commodities in 2020. The dollar, trade issues with China, and global economic growth will determine the path of least resistance for the commodities in this sector in the year that marks a new decade. I favor price strength in the sector in 2020.
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.