Commodities and Industrial Metals Outlook, Why Are They Diverging?

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Commodities and industrial metals have always moved in tandem. However, things have changed over the past few months. Industrial metals continue to rise in price while commodity indexes struggle to hit new ground.

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What’s up with that?

CRB commodity index (in orange) vs DBB industrial metals index (in black). Source: MetalMiner analysis of @Stockcharts.com data.

Two things have caused industrial metals to outperform the rest of commodity groups (agriculture, energy, etc) this year:

First, in November industrial metals got a boost as Donald Trump won the U.S. presidential election and his Republican party kept control of both houses of the Congress. Investors now hope that a Trump-led GOP government will boost domestic infrastructure, which could be a boon for industrial metals demand. In addition, the new president has stated he is willing to institute more measures to protect domestic producers.

China’s Pollution Performance

Second, and more importantly in my opinion, industrial metals have been benefiting from a tailwind since January when China’s pollution problems got worse. Steel and aluminum are leading this year’s rally. This is because these two are the most energy-intensive metals and China has shown a commitment to cut output.

3-Month LME aluminum prices accelerate as China begins its pollution crackdown. Source: LME data.

China said it will enforce a shutdown of about a third of aluminum capacity in the provinces of Shandong, Henan, Hebei and Shanxi over the winter season, which runs from the middle of November through the middle of March, putting at risk about 1.3 million metric tons of production.

Steel plate rising sharply this year. source: LME data.

The country has also pledged to eliminate all production of low-quality steel by the end of June and last month, China got specific about where that part will come from when the northeastern Chinese province of Liaoning promised to close more than 10 million mt of low-grade steel capacity over the next three months. In addition to the low-grade cuts, China also ordered steel producers in 28 cities to reduce winter output.

Commodity Prices Weaken

CRB commodity index struggles to resume bull market. Source: @Stockcharts.com.

Industrial metals are in a bull market, there is no question about that. I’ve been bullish on industrial metals since we called bottom in Q2 of 2016. However, at the same time I’m a bit doubtful about its sustainability.

Investors have been focusing on the supply side this year and they’ve found reasons to pour money into the industrial metals complex. But, I’m not sure for how long investors will be lured by this narrative of supply shortfall. Commodity prices have been rage-bound for the past 10 months and they seem to be having a hard time making new headway. That’s a sign of sluggish global demand.

What This Means For Metal Buyers

Industrial buyers should continue to expect higher metal prices throughout the year. However, a healthy bull market in base metals should be accompanied by a bull market in other commodity markets. That’s not completely the case right now. We will continue to monitor the performance of commodity markets closely. A break above the resistance line (see chart above) will be quite bullish for metal prices. On the other hand, further weakness in commodity markets could put an end on the industrial metals’ bull run.

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