By Kevin Grewal, Editorial Director at www.SmartStops.net
As the week opened with much optimism, industrial metals advanced for a fifth day as leader’s of the world’s largest economies bolstered confidence in the global economic recovery.
On Friday, Chairman of the Federal Reserve, Ben Bernanke, painted a picture of economic recovery in the near-term as did European Central Bank President Jean-Claude Trichet. As for Europe, the Euro-Zone has been performing fairly well as Germany and France showed healthy signs of an improving economy. In addition to this, the U.S. real estate market gave investors another reason to smile as the National Association of Realtors announced that existing home sales jumped 7.2%, notching their largest jump in the past two years; both gave a boost to industrial metals.
Copper climbed to its highest levels for the year, sending shares of Freeport-McMoRan Copper & Gold (NYSE:FCX) up 146% after a March low of $26.49 to close at $65.06 on Friday. In addition, lead, nickel and zinc reached levels not seen since mid-September of last year. This enabled basic resources companies, like BHP Billiton (NYSE:BHP) to close at $63.06 on Friday, a jump of 88% from a March low of $33.56.
Some believe that it will be hard for theses commodities to sustain their price levels due to the heavy drive in demand brought on by China, who has started to put the brakes on commodities purchasing. Iron-ore and other commodity imports were driven to China by the country’s economic stimulus package. In fact in the month of July, China imported nearly 55%of globally traded iron-ore and about 10% of coal.
The slowdown by China is evident by the August decline in the Baltic Dry Index, which is a barometer of shipping costs for commodities and a key leading indicator for global economic growth and production. In general, as the demand for commodities increases, the price of shipping commodities increases and the Baltic Dry Index follows. So far, for the month of August, the index has declined nearly 26%, the sharpest decline since a 72% skid in October caused by economic uncertainty.
Forward rates for Capesize vessles, the largest of the four vessel classes calculated in the Baltic Dry Index and the primary transport method for iron ore, have already started to price in a slowdown in Chinese demand, indicating that future demand for these materials is in question.
Lastly, in Europe, the volume of iron ore transported into and out of ports was down 76% in the region’s largest port and 97% in its second-largest port in the second quarter from a year earlier.
It appears that China’s philosophy of stockpiling metals and materials has been the primary driving force in the most recent uptrend seen in copper, iron-ore, and other materials. As China slows down, it will be difficult for these commodities to sustain their levels.
When investing in metals, materials and other commodities, there are inherent risks involved. A way to mitigate these risks is through the use of an exit strategy. According to the most recent data from www.SmartStops.net, an uptrend in the mentioned equities could be in trouble at the following price levels: FCX at $55.98 and BHP at $58.84. Keep in mind, these price levels fluctuate on a daily basis and updated data can be found at SmartStops.net.