Industrial metals have been on a tear since we called a bull market just about a year ago. However, we have recently witnessed some price weakness over the past couple of months.
Commodities like industrial metals are cyclical assets which tend to run in the same direction for long periods of time. The key is to recognize the peaks and valleys of the cycle to time your purchases accordingly.
The ongoing bull market in industrial metals has run for over a year and while some metals are experiencing some setbacks, it’s a good time to bring up the question: Are we nearing a peak or this is just a pause before prices break on the upside?
To answer this question, let’s look at what the main macro drivers are telling us:
China: Strong Indicators
As we all know, China is the world’s largest producer and consumer of industrial metals. Any changes on China’s supply and demand equation can have a huge impact on the price of metals. The performance of Chinese stock markets are a great gauge of investors’ sentiment on China’s economy. Since China became a major economy, we’ve seen a strong correlation between Chinese markets and metal prices.
Price momentum in Chinese markets has indeed picked up this year, tradin near a two year-high. The latest economic indicators continue to increase investors’ confidence in China.
China’s GDP came at 6.9% in the first quarter, the fastest pace in almost two years, up from a 6.8% growth in the previous quarter and putting the country well ahead of its goal of 6.5% annual GDP. Chinese investment in buildings, factories and other fixed assets rose 9.2% for the first quarter while construction starts surged by 11.6%. If that’s not enough, in April, China’s government announced plans to build a new megacity, which will increase the demand for steel and other industrial metals.
This growth translates into solid demand for industrial metals at the same time that China applies stricter anti-pollution rules and supply-side reforms designed to cut capacity in energy-intensive sectors like steel and aluminum. Overall, while we continue to see strength in Chinese markets, we are not ready to call peak in this industrial metals bull market.
US Dollar Falls to 5-Month Low
Base metals are commodities and, as such, move in opposite directions to the dollar. Over the past 20 years, every major bottom in commodities have coincided with a major peak in the U.S. dollar and vice versa. For a continuation of a bull market in industrial metals we should see weakness in the dollar. This year we have seen that.
According to the Wall Street Journal, on Monday, “the dollar fell to a five-month low due to a surge in the euro after the first round of the French presidential election eased concerns about the future of the European currency.” The notion is that the Euro would likely strengthen if Macron wins the election.
If centrist candidate Emmanuel Macron gets elected in the final round (May 7), markets might start to focus on a positive European economic picture and its higher growth relative to the U.S. That could potentially devalue the dollar against the euro, a bullish development for industrial metal prices.
What This Means For Metal Buyers
Industrial buyers need to watch closely for signs of a market top. For now, the recent price weakness in industrial metals seems normal in the context of a bull market and key indicators such as China and the dollar favor a continuation of this uptrend. Industrial buyers should continue to manage their commodity price risk exposure until we see real signs of a market peak.