We recently saw a short article in the Financial Times arguing that the link among industrial metals is vanishing and that individual metals are now moving more according to their “idiosyncratic fundamentals.”
In this post, we’ll make a few arguments why we disagree with it:
Correlation is not always a good measure to determine the relationship between metal prices, because short-term price fluctuations can make correlation numbers look worse. The key metric we use at MetalMiner is the direction of the trend, and you just need to take a look at a graph to know what’s going on, no need for correlation metrics.
The article even argues that copper’s relationship with aluminum has weakened over the past few years. Still, we see a strong relationship between both metals. In the chart above we can see how copper and aluminum have moved together, falling in tandem since both peaked in 2011. Over this four-year period, they only moved differently when aluminum rose during the first half of 2014 helped by an increased use of the metal in the automobile and aerospace industries. That disparity didn’t last too long, as both metals continued falling, recently hitting six-year lows.
Birds of a Feather
Indeed, every single base metal peaked in 2011 and all of them are now at or near multi-year lows. You must be blind to think that the relationship between metal prices has vanished. This close relationship has always been there and remains in place since similar macro-forces drive different base metals in the same way.
This is why our historical studies show that approximately 40% of the individual metal price movements are driven by the general market, another 30% driven by the metal sector and the remaining 30% driven by what is going on with that specific metal.
What This Means For Metal Buyers
Analyzing metals solely by their “idiosyncratic fundamentals” is never a complete analysis. What’s happening with the sector and with commodities across the board is as important, if not more than, as what’s happening with the individual metal. By simply understanding these three forces, you’ll do a way better job at managing your metal price risk.