Base Metals - Can 2017 Be A Repeat Of 2016?
Summary
- 2016 was a bullish year with double-digit gains.
- Copper and Aluminum prospects.
- Lead and nickel volatility ahead.
- Zinc and tin fundamentals still favor gains.
- Infrastructure building in the U.S., China and India.
Base metals are the building blocks of infrastructure around the world. The bull market in commodity prices that began in 2004 took the price of copper on a wild ride first to all-time highs of $4.2160 in May 2008 and many other base metals including aluminum, nickel, lead, zinc, and tin went along for the ride. In the wake of the global financial crisis the red metal dropped like a stone to lows of $1.2475 in December 2008 but then spent the next three years rallying in dramatic fashion to a new all-time peak of $4.6495 in February 2011 with its other base metal cousins in tow.
The February 2011 highs turned out to the pinnacle for the metals which then fell sharply in the years that followed. In 2012 through 2014, the composite base metal sector moved appreciably lower. In 2015 it fell by 23.4% but in 2016, the sector experienced a reversal of fortune.
Base metals prices are often an excellent signal for the health of global economic conditions and the price action last year is telling us that the landscape looks a lot better than it has for quite some time.
2016 was a bullish year- Double digit gains
2016 was a bullish year for industrial commodities but it did not start that way. Early in the year, metals fell to multiyear lows but important bottoms formed in all of the markets. Base metals likely overextended downside losses, as volatile commodity prices tend to move past equilibrium levels. However, beginning in late February, the industrial commodities began to rebound.
The base metals sector of the commodities market posted a 26.77% year-on-year gain in 2016 led by zinc which was up 59.53%. Tin was the second best performer with a 44.1% increase in price while all other metals in the sector; copper, aluminum, nickel and lead added double-digit gains. Base metals traded on the London Metals Exchange (LME) were the second best performing sector of the raw materials market in 2016 with energy leading the way on the upside.
Copper and Aluminum prospects
Copper and aluminum are the two most liquid metals traded on the LME. The price of copper was one of the last base metals to move higher during 2016. However when it broke through technical resistance at the $2.32 per pound level on November 7, the price exploded higher rising to highs of $2.7530 on November 28, an increase of more than 18.5% in a matter of three weeks.
Source: CQG
As the daily chart of COMEX copper shows, the market continues to be in an uptrend in 2017 with the red metal higher than the December 30 close at $2.5085 per pound on COMEX and $5520 per ton on the LME. On Friday, January 11 copper was trading at $2.69 and it settled the day before at $5778 per ton on the LME. When it comes to inventories of the red metal, the price responded to declines in inventories at the LME. 
As the chart shows, copper stocks hit highs at almost 380,000 tons in September but they declined to under 220,000 by late November causing the price to take off to the upside. Inventories quickly rose in December only to fall again as the end of the year approached and into the beginning of 2017. Copper stocks on the LME were at the 285,700 ton level as of January 12. Technically copper now looks ready to challenge the late November highs at just over $2.75 per pound but that may depend on the trend of inventories over coming weeks.
Aluminum closed 2016 at around $1701 per ton on the three month LME forward contract. 
As the one year chart highlights, the price of aluminum rallied steadily throughout 2016 and has moved higher in early 2016 closing on January 12 at $1787 per ton. 
Over the past five years, LME stocks have dropped from almost 5.5 million tons to around 2.25 million. While the decline has been dramatic, there continues to be huge stockpiles of aluminum in China as the nation suffers from a glut of the metal. While the prospects for all metals are looking good for 2017, it may be difficult for aluminum to repeat its 12.4% gain in 2016 this year but the trend is certainly higher over the first two weeks with the metal up 5% already.
Lead and nickel volatility ahead
Nickel is the second most volatile metal that trades on the LME. Nickel moved 16% higher in 2016 and closed the year at $10,090 per ton. In 2014, the price of nickel was above the $20,000 per ton level. 
Nickel appreciated over the course of 2016 but ended the year off of the highs seen during the early part of the fourth quarter. On Thursday, November 12 LME nickel was trading at the $10,020 per ton level just a little below the price at the end of the year that just ended. 
Stockpiles of nickel rose steadily from 2012 through 2015 when they reached a peak of over 450,000 tons. However, on January 12 inventories on the LME stood at the 372,000 level. The prospects for nickel look positive with the price making higher lows and inventories on the decline.
The price of lead was 8.32% higher in 2016 and on the LME the metal closed the year at $1995 per ton. 
As the chart illustrates, the toxic metal exploded higher in the second half of 2016 before correcting lower at the end of the year. Lead is significantly higher in 2017, closing on January 12 at $2195 per ton. 
Over the past five years, lead inventories have declined precipitously from over 380,000 in 2012 to 192,675 on January 12. The increase in the price of oil over recent months could lead to more demand for battery operated automobiles increasing the demand for lead. The price action and the trend in stockpiles remain positive for the price of lead.
Zinc and tin fundamentals still favor gains
Zinc and tin were the beasts of the base metals complex in 2016 and the best performing metals. Fundamental deficits in both metals caused massive gains of almost 60% and 44% respectively. 
Zinc closed on December 30 at $2578 per ton on the LME and by January 12 the price was already higher at the $2735 level. 
Over the past five years, LME stocks have declined from over 1.2 million tons in 2012 and 2013 to 424,175 on January 12. The drop in inventories is a result of mine depletion in major zinc producing regions of the world. As zinc production continues to decline, the prospects for price gains remains strong in 2017.
Finally, tin is the least liquid and most volatile metal that trades on the LME. A 44% price gain put the price of the metal at $20,930 on December 30.
On January 12 tin was up on the year at the 21,050 per ton level. While there is likely a high level of unreported tin stocks in China, official LME warehouse inventories were at 3,825 tons on January 10, close to the lowest level since 2000. Most base metals analysts believe that the tin market will continue in a fundamental deficit until at least 2020 which is likely to lead to further price appreciation for the illiquid metal.
Infrastructure building in the U.S., China and India
Last week, China reported better than expected economic data which caused the prices of many industrial commodities to move higher. China is the world's leading consumer of base metals when it comes to demand for infrastructure building. Another Asian nation that is likely to see an increase in demand for the metals that are the building blocks for construction is India. The world's second most populous nation will need to build in the years ahead. However, the latest boost to the industrial commodity sector is coming from a nation that has not had massive construction demand since the 1950s.
The election of Donald Trump, a real estate builder, as the forty fifth President of the United States is likely to provide support for base metals prices and all industrial commodities over coming years. During his campaign for the highest office in the land, President-elect Trump promised the nation to do what he does best, build. The roads, bridges, tunnels, airports and railroads in the U.S. are long overdue for an update and that construction project will require massive quantities of metals, minerals and energy. Additionally, the construction of a security wall along the southern border of the nation will increase demand for these industrial commodities. With a Republican Congress and Senate behind him it is probable that the legislature will approve the funds for rebuilding. The bottom line is that the global economy is looking a lot better at the start of 2017 than it has looked in almost nine years and the demand for industrial commodities is likely to rise, perhaps dramatically.
While base metal prices moved higher in 2016, they remain far below the levels seen at the highs in 2011. Additionally, over the past five years, stockpiles of aluminum, lead, zinc, and tin have moved lower. While copper and nickel inventories are still above 2012 levels, they appear to have peaked and are now heading lower. Of course, it is possible that China has massive unreported inventories of base metals within its borders. However, the Asian nation has tremendous experience as an aggressive trader and they will seek to take advantage of increasing demand by not flooding the market and only selling at progressively higher prices in a bull market.
The over 26% gain in base metals prices in 2016 could only be the start of price appreciation in the sector. 2017 may not only be a repeat of 2016, it is possible that prices of all of the nonferrous metals will move even higher on a percentage basis over this year that is only two weeks old.
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This article was written by
Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup.
Over the past two decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities.Andy understands the market in a way many traders can’t imagine. He’s booked vessels, armored cars, and trains to transport and store a broad range of commodities. And he’s worked directly with The United Nations and the legendary trading group Phibro.
Today, Andy remains in close contact with sources around the world and his network of traders.
“I have a vast Rolodex of information in my head… so many bull and bear markets. When something happens, I don’t have to think. I just react. History does tend to repeat itself over and over.”
His friends and mentors include highly regarded energy and precious metals traders, supply line specialists and international shipping companies that give him vast insight into the market.
Andy’s writing and analysis are on many market-based websites including CQG. Andy lectures at colleges and Universities. He also contributes to Traders Magazine. He consults for companies involved in producing and consuming commodities. Andy’s first book How to Make Money with Commodities, published by McGraw-Hill was released in 2013 and has received excellent reviews. Andy held a Series 3 and Series 30 license from the National Futures Association and a collaborator and strategist with hedge funds. Andy is the commodity expert for the website about.com and blogs on his own site dynamiccommodities.com. He is a frequent contributor on Stock News- https://stocknews.com/authors/?author=andrew-hecht
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