Lumber And Copper Bounce - Watch Iron Ore And The BDI

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Includes: AGQ, BDD, BDG, BLNG, BOM, BOS, CEF, CPER, CUPM, DBB, DBP, DBS, DGL, DGLD, DGP, DGZ, DSLV, DULL, DZZ, FOIL, GEUR, GHE, GHS, GLD, GLDI, GLDW, GLL, GLTR, GTU, GYEN, HEVY, IAU, JJC, JJM, JJN, JJP, JJT, JJU, LD, LEDD, NINI, OUNZ, PALL, PGM, PHYS, PPLT, PSLV, PTM, QGLDX, RJZ, SGOL, SHNY, SIVR, SLV, SLVO, SPPP, UBG, UBM, UGL, UGLD, USLV, USV, ZSL
by: Andrew Hecht

Summary

Lumber finds a bottom one tick above technical support.

Copper moving toward technical resistance and fails.

Iron ore remains a dog.

The BDI points to weak demand.

Legislative initiatives and Chinese growth needs to breathe life into industrial commodities.

We have seen some industrial commodities markets go from famine in late 2015 and early 2016 to feast in late 2016 and early 2017. However, over recent months the price of many of the staple raw materials necessary for building infrastructure around the world have moved back into famine mode, and price trends have turned bearish.

Commodities required for construction projects began to recover long before the election of Donald J. Trump as the forty-fifth President of the United States last November. However, the surprise election results vaulted many of these commodities to new highs, and they continued to rally into early 2017. The pledge of infrastructure rebuilding in the United States and the hope that fiscal stimulus in the world's richest nation would spark an economic rebound around the globe caused buying in stable raw material markets.

The price of iron ore rose to $90 per ton in February 2017, after trading below $40 in late 2015. Copper rallied from $1.9355 per pound in January 2016 to $2.84 thirteen months later. Lumber rallied from under $300 per 1,000 board feet to over $410, and crude oil which traded at $26.05 in February 2016 appreciated to over the $50 per barrel level. There are so many other examples of commodities markets in metals, minerals and the energy sectors that moved from famine to feast at the start of this year, but many of those prices have turned south once again over recent months.

Lumber finds a bottom one tick above technical support

Lumber is a construction staple and there lots of things going on in the timber market these days. The potential for a trade war with Canada has ignited volatility in the lumber market as fears of protectionist policies could cause shortages of wood at a time when new home building in the United States continues to grow. The low interest rate environment and prospects for fewer regulations which could expand the addressable market for new home buyers as banks ease lending standards led the price of lumber futures to the highest level since 2005 in April. However, the price has cascaded lower since those recent highs. The prospects for infrastructure rebuilding in the U.S. fueled gains in many industrial commodities and the lack of progress on those initiatives over the past few months has caused some degree of disappointment. Source: CQG

As the weekly chart of the highly illiquid CME lumber futures highlights the July contract has declined from $414.60 in mid-April to lows of $340.30 at the end of May. After rising to the highest price in a dozen years, lumber fell almost 18% over a six week period. Technical support for lumber futures on the weekly chart stood at $340.20, the mid-March 2017 lows and the price came within one tick or ten cents of that price and have since recovered. July lumber futures were trading on Thursday, June 15 at the $365 per 1,000 board feet and it is possible that the correction ended with a bottom and a higher low, albeit one tick or ten cents above the support level for the industrial commodity.

Copper moving towards technical resistance

Lumber is a benchmark commodity rather than a vehicle for trading because of its lack of liquidity, but the price of lumber can yield significant signals when it comes to economic conditions. When it comes to the health of global economic conditions and the prospects for building and construction projects around the world copper has typically been the bellwether commodity. The red metal surged higher late last year as it broke above technical resistance and rose to highs of $2.8230 per pound on the July COMEX copper futures contract in February. Source: CQG

The weekly chart of copper futures contracts illustrates that, like lumber, the price of the red metal declined to lows of $2.4700 per pound in early May but had since recovered to around the $2.65 level where the red metal ran out of gas and fell back below $2.60 per pound. Technical support for copper was at $2.45, the late December 2016 lows but copper was able to fend off a test of support falling to lows that were only 2 cents above the technical level. Both copper and lumber futures corrected lower, did not reach critical support and have since bounced higher.

When it comes to two other significant benchmark prices for the industrial world, the price action has been less promising over recent weeks.

Iron ore remains a dog

Iron ore is the primary ingredient for steel production, and when it comes to construction projects, there is no more important raw material than the steel that strengthens a building or section of infrastructure. Iron ore experienced a fantastic rally as the price exploded from lows of $38.03 in December 2015 to highs of $90.25 per ton in March 2017. The increase of over 137% in fifteen months was the result of the same reasons that caused the price of wood to fly higher and copper to break out to the upside after a bear market gripped from red metal from 2011 through late 2016. Like lumber and copper, iron ore fell from those highs a few months ago, but it has not been able to find a bottom, yet. Source: Barchart

As the chart of August iron ore futures demonstrates, the price has declined to $53.38 per ton, over 40% below the March highs and the industrial commodity remains at its lows. Support for iron ore futures is now around the $45 level as other areas of support have given way during the current price correction. Iron ore has suffered more for the corrective phase than lumber or copper.

The BDI points to weak demand

Another significant benchmark for the strength of the industrial commodities sector is the Baltic Dry Index. The BDI represents the cost of shipping dry bulk commodities around the world. Source: https://www.bloomberg.com/quote/BDIY:IND

As the chart of the BDI shows, the index fell to its lowest level in history in February 2016 at around the 290 level and then rallied to highs of over 1300 in March of this year. The weakness in industrial commodities prices over recent weeks has sent the index back down to 865 in a sign that global demand for raw materials has declined dramatically over recent weeks.

Legislative initiatives and Chinese growth needs to breathe life into industrial commodities

Copper and lumber have recovered from recent lows while iron ore and the Baltic Dry Index continue to trade near their recent lows.

The industrial sector of the commodities market has been suffering from two issues. The recent downgrade of Chinese debt by Moodys is a sign that economic growth in the Asian nation is lethargic. China has been the world's leading commodities consumer for decades, and raw material prices tend to follow the Chinese economy. Perhaps more importantly over recent months has been the pessimism that has risen from the ashes of optimism about infrastructure rebuilding projects in the United States. On the campaign trail, President Trump pledged to spearhead the biggest rebuilding project in the U.S. since the Eisenhower Administration in the 1950s. Raw material prices soared in the aftermath of his election on the prospects for increasing demand for construction building staples. However, the reality of the legislative process in Washington DC coupled with some failures on that front and the other issues facing the new administration have weighed heavily on the prices of industrial commodities.

At this point, the market will need to see advances in legislative initiatives, Chinese economic growth or a bit of both to breathe new life into the raw material markets. Copper and lumber prices have recovered over recent sessions, to some extent, but iron ore and the BDI continues to flirt with lows. One set of these industrial benchmarks will eventually take the others along for a ride when the path of least resistance for the industrial sector becomes apparent. Right now, while lumber and copper look like they may have found bottoms, iron ore and the BDI are telling the market, do not come to any concrete conclusions about the demand for raw materials too fast.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.