Do Base Metals Actually Follow the Same Price Trends?

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Supply and demand for each base metal certainly has its own set of characteristics and remains the main reason why analysts study them separately. After all, it makes sense that inventory levels and supply shortages would affect each metal differently. And though you our readers may only buy one or a sub-set of all the metals we track here at MetalMiner, we thought it might still make sense to broadly evaluate all base metal price trends particularly since many other commodities arguably follow similar trends.

Copper Alum

 

Copper vs Aluminum LME monthly cash price, relative scaling.

 Source: LME, MetalMiner

A pair of base metals can highly correlate during a period of time but may diverge in the short term. The key becomes understanding and knowing when a particular correlation appears strong vs. when it begins to shift. As we can see in the graph above, during the past five years, copper and aluminum have followed the same medium to long-term trends. In fact, we have seen the same behavior for the other base metals including: lead, nickel, tin and zinc:

Base Metal Compare

 

Lead, Nickel, Tin and Zinc LME monthly cash price, relative scaling.

Source: LME, MetalMiner

When comparing prices, the sharpness in price peaks and troughs differs from metal to metal but when we look at the overall picture, we see that the six base metals analyzed have followed similar patterns. From 2008 until today, correlations among the base metals have held over 70% (Editor’s Note: anything over 70% is considered a strong correlation) and for some pairs the correlation measures even higher. In the case of lead and zinc the correlation is 94%.

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So, if each base metal has different applications and sources of supply, what makes them behave similarly?

Macroeconomic factors have an impact on metal prices. A mix of different factors such as industrial activity, economic growth, international trade or interest rates can drive commodity demand and make investors bid up prices in anticipation of scarcity and vice versa.

Copper Economic Indicator

 

Copper LME cash price; US Leading Indicator and PMI

Source: LME, MetalMiner

Some economic indicators can give us insight into the US economy for the near term and help us to depict these long-term trends. The latest government data and the actions that the Federal Reserve has taken suggest a hazy picture of the US economy. Meanwhile, some economists don’t feel particularly optimistic about the U.S economic outlook in 2014 or certainly the latter half of the year.

Regardless of the particular metals one buys, applying some level of rigor into tracking US economic data likely makes good sense. Buying organizations will want to identify those downward cycles before they purchase metals.

FREE Download: The Monthly MMI® Report – covering the Aluminum markets.

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