Why Base Metals Are the Building Blocks of Infrastructure
Base metals are nonferrous, meaning they contain no iron. This sector of the commodities market includes copper, aluminum, nickel, lead, zinc and tin. There are several exchanges around the world that offer contracts in these metals but the hub of international trading is the London Metals Exchange (LME). While futures exchanges offer standardized contracts for specific months the LME is a forward exchange, the most actively traded contracts on the exchange are not monthly, rather they are for delivery 90 days forward.
The LME is the most producer and consumer-friendly exchange in the world as its contracts are tailor made for industry; market participants can make or take delivery any business day of the year according to their individual hedging requirements.
Base metals are the building blocks of society. Price movements often signal global economic growth or contraction. Therefore, this sector of the commodities market offers insight into economic trends around the world. For many decades, China has been the most important consumer of base metals market given the nation’s economic growth. However, a slowdown in the Chinese economy in 2015 caused many of these metals to fall to lows in late 2015 and early 2016 before a price recovery occurred.
In late 2016, one of the issues in the U.S. Presidential election was rebuilding the infrastructure of the nation. Donald J. Trump was elected the 45th President of the nation with a background in real estate construction and the new President pledged to the nation to become the builder in chief.
The last time there was a major infrastructure project in America was in the 1950s under the Eisenhower administration. It is likely that a major overhaul of roads, bridges and transportations hubs such as airports and train terminals will be a main goal of the Trump administration. In response to the election of the new President and his platform the prices of many industrial commodities, including base metals, staged an impressive rally.
Each of the base metals has its characteristics and uses.
Copper is an economic bellwether commodity. The world’s major copper producer is the South American nation, Chile. The largest consumer is China. Copper has numerous beneficial qualities. It does not corrode and is a superconductor of electricity. Construction, piping, refrigeration, air-conditioning, cookware, computers, and even some medicines require copper. The metal’s main alloy is brass, is in the production of musical instruments, construction materials, jewelry, as well as some artwork. The trading hub for copper is the LME but the COMEX division of the Chicago Mercantile Exchange (CME) offers a standard futures contract in the red metal. The ETN product in copper that trades on the NYSE is the iPath Bloomberg Copper Sub TR ETN- Symbol JJC.
Aluminum is perhaps the most liquid base metal; it trades the most volume on the LME. Aluminum is the third most abundant element in the earth’s crust. The leading producer and consumer of aluminum in the world is China. Russia and the United States are also major producing nations. Aluminum is a versatile and lightweight metal. It has a myriad of uses in automobiles, motorcycles, airplane parts, license plates, roofs and gutters.
Aluminum is also a critical ingredient in the production of window frames, paint, cans, trays, foils, bottle caps, gum and candy wrappers, light bulbs, phone and power lines, sports equipment, food additives, and even aspirin as well as many other consumer and building products. The LME offers both and aluminum and aluminum alloy forward contracts. The ETN product in aluminum that trades on the NYSE is the iPath Bloomberg Aluminum Sub TR ETN- Symbol JJU.
Nickel is a silvery-white and lustrous metal with a slight golden glow and it is one of the least liquid metals traded on the LME. The price of nickel can be very volatile. One of the major properties of nickel is that it is resistant to corrosion. Nickel is a metal that is plating for iron and brass. Nickel is ferromagnetic, while strong magnets require iron and rare earth metals, magnets of intermediate strength utilize nickel.
Nickel is also a component in the production of coinage, glass, rechargeable batteries as well as some bullet proof safes. The largest producers in the world are China and Russia but Japan, Canada, Australia and Norway also produce the metal. Cuba is a producer of nickel. China has been the dominant consumer of nickel in the world over recent decades because of its infrastructure building projects. The highly volatile price of nickel often causes the price of swing back and forth between contango and backwardation as supply shortage and glut conditions occur in the metal. The LME is the hub of international nickel trading. The ETN product in nickel that trades on the NYSE is the iPath Bloomberg Nickel Sub TR ETN- Symbol JJN.
One of the earliest metals discovered by humans was lead. In Turkey, a lead statue dates back all the way to 6,500 BC. The Roman Empire used lead for many purposes including pipes, bathtub linings, cosmetics and paints and even for food and wine vessels. The Romans thought that the metal added flavor to food, they often cooked in lead pots. However, lead is a toxic metal and the toxins collect in the body over time. Many members of the Roman aristocracy suffered from lead poisoning leading many historians to believe that lead was one of the causes for the decline of the Roman Empire.
Today, the single leading use of lead is in the manufacturing of batteries but the metal is also used for some alloys and in the construction of nuclear reactors. Some artistic paints and certain types of ammunition still contain the metal. Lead was a component in the production of gasoline for many years as the properties in the metal protect against engine knocking. However, today many countries, including the United States ban lead in fuels.
The largest producer of lead in the world is China, Australia, Peru, the United States, Canada and Mexico. Lead concentrates yield small percentages of gold and silver during the refining process to produce the metal. Lead is an actively traded metal on the LME. The ETN product in lead that trades on the NYSE is the iPath Bloomberg Lead Sub TR ETN- Symbol LD.
Zinc is the third most actively traded metal on the LME behind aluminum and copper. Centuries before the discovery of zinc as a metal, brass and zinc compounds required zinc ores many of which we still find in medicinal agents for soothing wounds and sore eyes.
The main use for zinc goes into galvanizing steel as a protection against corrosion. Zinc is also an important metal when it comes to the die-casting industry and rolled zinc applications in gutters, roofing, pipes, coinage and the production of compounds.
China is the leading producer in the world and Peru, Australia, the United States, Canada and India also supply the world with a significant output of the metal each year. China is the leading consumer of zinc because of the sheer size of the country’s population and its requirements for infrastructure building. There are no specific liquid zinc ETN products in the U.S. but, the PowerShares DB Base Metals ETF Symbol DBB includes zinc as well as other base metals traded on the London Metal Exchange.
Tin is one of the oldest metals known to humankind. It is the most illiquid or thinly traded metals on the LME. The illiquidity of tin leads to massive price swing and periods of shortages and gluts. When it comes to the tin market, availabilities are either a feast or a famine each year.
Electroplating requires a coat of tin applied to copper, aluminum, steel or other metals. There are many household applications for tin. We find tin in many pharmaceutical solutions, capacitors in electrodes, fuse wires, ammunition, fungicides and pesticides, solder and pewter. Even toothpaste requires tin fluoride as a critical manufacturing component.
China is the world’s largest tin producer but Indonesia, Peru, Bolivia and Brazil are also important suppliers of the metal to the world. The second largest reserves of tin in the world are in Malaysia; the state of Penang is the center of massive tin mining and refining operations.
Tin is a nontoxic metal. Therefore, it has replaced lead and other toxic elements in the manufacture of many goods including electronics and ammunition over recent decades. China is the world’s leading consumer but the U.S., Japan and Russia are all important importers of the metal. The ETN product in tin that trades on the NYSE is the iPath Bloomberg Tin Sub TR ETN- Symbol JJT.
We all should be familiar with base metals as they are often the metals used to produce currency or coins. One of the problems with using some of the base metals for coinage is that the prices of these metals can be so volatile at times the value of the metal contained in a coin could be more than the face value of the coin.
Base metals are the building blocks of infrastructure around the world. If you look around your home it is likely that you will find all of these critical metals. Copper is in the pipes that bring fresh water and it is also part of your computer. Aluminum is one of the primary metals in your car and your window frames. You will find nickel in batteries or in the safe where you store valuables. Lead is in many of the batteries and the chances are there is lots of tin in your fuse box as well as in the electrical system in your house. Except for copper, which trades on the COMEX, the only place that offers liquid and active trading contracts in the base metals is the LME. However, there are ETF and ETN products that replicate the price action in many of these important metals.
While few investors trade base metals directly, it is a good idea to watch the price action and trends in these metals carefully. Base metals can provide some of the best clues as to the strength or weakness of the global economy. Additionally, so many of the companies that we invest in require copper, aluminum, nickel, lead, zinc or tin in their manufacturing processes. When the price of these metals moves higher or lower it can influence the cost of goods sold of these companies leading to higher or lower earnings.