For Base Metals: “There Will Be Growth in the Spring”

Eric Fry By Eric Fry
Macro Strategist, The Oxford Club

Metals

The International Monetary Fund believes the world economy is gaining strength and will continue to do so. Base metals are making an identical forecast.

Together, the IMF and base metals seem to be echoing Chauncey Gardiner’s memorable line from Being There, the classic Jerzy Kosinski novel, “There will be growth in the spring.”

During the last 12 months, the prices of base metals such as copper, aluminum and nickel have been ratcheting higher. That’s a promising sign for the world economy.

Historically, base metal prices trend higher as economic conditions improve. The connection between the two is fairly straightforward: An economy that is growing briskly requires ever-greater quantities of base metals to construct and/or improve infrastructure.

Houses, office buildings, bridges, tunnels, power lines, wind farms, trains, automobiles and cell towers all require base metals.

In times past, the relationship between economic activity and the price trend of base metals was so close that copper gained the nickname “Dr. Copper, the metal with the Ph.D. in economics.”

That relationship has weakened somewhat over the last couple of decades, but a close connection between the two remains. And in the current economic environment, copper is not the only metal in a rising price trend. All base metals are moving higher, as if tracking the scent of an improving global economy.

The IMF has picked up the same scent.

“The cyclical recovery continues,” the IMF declared in its most recent forecast. “Indicators… provide signs of continued strengthening of global activity. Specifically, growth in global trade and industrial production remain well above 2015-2016 rates… Purchasing managers’ indices signal sustained strength ahead in manufacturing and services…

“Emerging and developing economies are projected to see a sustained pickup in activity, with growth rising from 4.3% in 2016 to 4.6% in 2017 and 4.8% in 2018.”

Obviously, this forecast might not pan out as nicely as the IMF anticipates. On the other hand, the signal of economic strength coming from the base metals sector is stronger than usual.

During most of the significant rallies in base metals during the last four decades, other commodity sectors have rallied at the same time. In other words, the base metals have gained ground as part of a broad commodity rally.

But that’s not what’s happening this time. Instead, the base metals are moving higher all by themselves. This conspicuous strength suggests that base metals are moving higher for one simple reason: strong demand.

Therefore, as the global economy continues to pick up steam, base metal prices are likely to continue heading higher… perhaps much higher.

A couple of “wild-card” sources of demand could push overall demand for base metals above what might occur during a “normal” period of global economic growth.

First, the widespread devastation in Puerto Rico, Florida, Texas and numerous Caribbean islands will produce a large one-off demand for all sorts of construction materials – from lumber to zinc to copper.

Second, “green technologies” that are gaining an ever-larger footprint worldwide are big consumers of base metals. Solar power, wind power and electric vehicles all require massive quantities of copper and other base metals.

Bottom line: The upcoming global economic growth cycle could be much more metal-intensive than growth cycles of the past.

Watch this space!

Good investing,

Eric