Base Metals And Industrial Commodities- Second Quarter 2020 Review

Base Metals And Industrial Commodities- Second Quarter 2020 Review

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Base metals rose 12.88% in Q2.

Copper- The leader of the pack leads the way on the upside.

All members of the sector post gains- Double-digit percentage increases in copper, nickel, and tin.

Iron ore rallies almost 20%.

The BDI explodes to the upside.

In 2019, the six LME nonferrous metals were 1.74% higher from the closing level at the end of December 2018. In Q1 2020, the sector plunged 17.09%. In Q2, it came back and was 12.88% higher. Over the first six months of this year, base metals were 6.58% lower. The best performing commodity in the base metals sector in Q2 was LME copper, which rose 25.61%. COMEX copper was 21.79% higher for the quarter, and the nearby COMEX futures contract fell 20.34%. Tin moved 16.83% higher during the quarter, while the price of nickel gained 13.62%. Zinc recovered by 9.98%, and aluminum was 6.40% higher. The price of lead gained 4.83% in Q2.

Meanwhile, the price of iron ore moved 19.06% higher in Q2. The Baltic Dry Index exploded 227.37% to the upside over the period after substantial losses of over 40% each in Q4 2019 and Q1 2020.

Industrial commodity prices experienced a perfect bearish storm as economic activity around the world ground to a halt as the Coronavirus spread across the globe in Q1. When OPEC and Russia abandoned production quotas on March 6, the price of crude oil dropped to the lowest levels in almost two decades. Falling energy prices cause production costs to decline, allowing producers to sell at far lower levels. At the same time, wild currency volatility and uncertainty in markets across all asset classes weighed on the sector. Moreover, a deflationary spiral that began in China and spread across the world over the past three months created the most bearish conditions in the stock market and all other asset classes since the 1930s.

2020 started with optimism over trade as the US and China signed a “phase one” deal that de-escalated the trade war that had hung over industrial commodities and other markets throughout 2019. Many commodities, including base metals, hit their highs for the first quarter and the first six months of this year during the early days of 2020. As the Coronavirus spread began to impact the Chinese economy, prices fell. China is the demand side of the equation for base metals, industrial commodities, and most raw materials. When the virus spread beyond China’s borders in February, prices slumped, at the end of the month and into March, the slump turned into price carnage. Prices reached lows with the stock market in mid-March, before the end of the first quarter.

Central banks around the world slashed interest rates. Monetary and fiscal stimulus programs rose to unprecedented levels throughout March. Short-term interest rates in the US fell to zero percent, and both the US Fed and ECB fired bazookas of liquidity at markets. Typically, falling interest rates are supportive of base metals and commodities prices as they lower the cost of carrying inventories.

In Q2, prices rebounded as some optimism returned to the industrial commodity markets. Chinese demand began to rise, crude oil made a comeback, and base metals and other raw material prices rose. If the impact of central bank and government stimulus in the aftermath of the 2008 financial crisis is an example for industrial commodities, we could see prices move a lot higher over the coming months and years. The amount of stimulus in 2020 is far higher than in 2008. At the same time, the value of the US dollar index declined by 1.76% in Q2, which is also supportive of base metals, industrial raw materials, and other commodity prices. The bottom line is that the response of governments around the world supported the industrial sector of the commodities market in the second quarter.

The Invesco DB Base Metals product (DBB) reflects the price action in copper, zinc, and aluminum on the London Metals Exchange. The base metals tend to move together when it comes to macroeconomic issues and risk-off environments. In Q3, the global economic contraction will be the leading factor facing markets as the world looks to contain the spread of the virus. The economic legacy of Q1 and Q2 2020 are a dark financial cloud hanging over the markets for years to come causing wide price variance.


In 2019, the red metal was 6.43% higher in the futures market in the US and 3.38% higher on the three-month forward market at the LME in London. Copper is the leader of the base metals sector, and it led it lower in Q1 with a loss of 20.34% on COMEX and 22.17% on the London Metals Exchange. In Q2, LME copper was 25.61% higher, and the red metal moved 21.79% higher in the futures market on COMEX.

In early Q1, copper traded to a peak of $2.8930 when the global pandemic began to take hold of markets and worsened throughout the quarter. The price fell to a low of $2.0595 on the continuous contract in mid-March when a V-shaped recovery began and carried the price higher throughout Q2.

Source: CQG

As the weekly chart highlights, copper had made lower highs and lower lows since June 2018 until Q1 when it broke to the downside and moved towards the $2 level on the continuous futures contract. The recovery took the price back over the $2.70 level by the end of Q2. Copper was in overbought territory on the weekly chart at the end of Q2 as the price was working its way towards the 2020 continuous contract high at $2.8860 per pound.

Meanwhile, production of copper has suffered in Q2 as mine closures because of the global pandemic has weighed on output and mining operations throughout South America and other copper-producing countries worldwide.

US interest short-term interest rates declined to the levels seen in the aftermath of the 2008 global financial crisis during Q1 and Q2 at zero percent. Fiscal and monetary policy stimulus rose to unprecedented levels in March, but the flood of liquidity to stabilize markets is a symptom of the global pandemic and its impact on the worldwide economy. Copper is likely to continue to reflect the risk-off conditions and halt in business activity around the globe of the pandemic continues to claim victims. However, a slowdown in output has provided support for the price along with weakness in the dollar and unprecedented levels of central bank and government stimulus.

Volatility increased dramatically in the currency markets with wide swings in the US dollar versus euro currency pair in Q1. The dollar index traded in a wide range as the crisis unfolded, but the greenback index moved higher over the first three months of 2020. The dollar index reversed and retreated in Q2. Meanwhile, the strength of the price of gold in Q2 continues to be a flashing sign that all currencies are moving lower even though the dollar continues to be the strongest foreign exchange instrument. The dollar may be the king of currencies, but gold is the monarch of money. Lower rates tend to be bullish for commodities prices over time, but these are anything but ordinary times in our lives. Gold reached the $1800 level at the end of Q2, the highest price for the precious metal since 2011.

The European Central Bank remains highly accommodative when it comes to monetary policy. Under President, Christine Lagarde, the ECB fired a liquidity cannon at the financial system in an attempt to provide stability in March. Additional monetary and fiscal policy moves are on the horizon in Q3 as the continent continues to deal with the economic and human toll of the virus. At the end of Q2, Europe seemed to be in better shape when it comes to the virus than the US.

Copper traded to lows of under $1.25 in 2008 in the wake of the world financial crisis. In 2000, the price of the red metal was 85 cents per pound. Before the mid-2000s, copper never traded above $1.60 per pound. Copper traded to a low of $1.9355 in January 2016, which is a level of critical support below the mid-March bottom at $2.0595. Copper has recovered to a level where it was closer to the technical resistance is at the mid-January high of $2.8860 per pound at the end of Q2.

Wide price variance in the copper futures and forward market, as well as all other markets, is likely to continue in Q3 and beyond. If 2008 is an example for the copper market, we could see far higher prices for the red metal in the coming months and years.

Nearby copper futures on COMEX settled at $2.7135 on June 30, and three-month forwards on the LME were at $6043.50 per ton. Copper was only 2.99% lower on COMEX and 2.24% lower on the LME over the first six months of 2020.


Three-month LME aluminum forwards moved 0.92% lower over in 2019. In Q1, aluminum forwards fell 16.68%, but in Q2, the market recovered by 6.40%. Aluminum forwards on the LME were 11.35% lower over the first six months of 2020.

While trade was the critical issue for the aluminum market in 2018 and 2019, like all other markets, the halt of the global economy on the back of the worldwide pandemic weighed on the price of the nonferrous metal leading to an almost 11.35% decline over the first half of 2020.

Shares of Alcoa (AA) rebounded with the recovery in the price of aluminum and the stock market in Q2. AA shares closed Q1 at $6.16 per share and rallied to $11.24 at the end of Q2, a rise of 82.5%. Meanwhile, AA shares closed 2019 at $21.51 per share and remained at almost half that price level at the beginning of Q3. AA outperformed the price action in aluminum and the stock market in Q2 after a significant underperformance in Q1. At the end of Q2, the US was poised to slap a 10% tariff on aluminum from Canada, which could cause increased volatility in the market over the coming weeks and months.


Nickel moved 31.79% higher in 2019 as the market prepared for Indonesia’s export ban that started on January 1, 2020. In Q1, the price of nickel forwards on the LME posted a 19.73% decline as risk-off conditions trumped all other fundamental and technical factors. In Q2, nickel came storming back with a 13.85% gain and was 8.80% lower through the first six months of 2020 in an unusually challenging environment for all industrial commodities. Nickel moved higher over the three months on the back of increased demand for stainless steel and batteries.

Indonesia is a leading nickel producer. The market had expected a mineral export ban to begin in 2022. However, the government accelerated the ban, which started on January 1, 2020. The price of nickel exploded higher on the back of the export ban in Indonesia in 2019. The trend towards electric automobiles continues to underpin the nickel market. Nickel was the best-performing base metal in 2019 and the only metal to post a double-digit percentage gain for the year. Coronavirus in Q1 caused the price of nickel to implode, but the price held the $11,000 per ton level and moved higher over the second quarter.

When it comes to nickel, iron ore and steel demand are substantial factors for the price of the nonferrous metal. Nickel is highly sensitive to changes in global economic conditions, as we witnessed in Q1 and Q2. Nickel is a very volatile metal, and we could see a wide price range for the metal in Q3, but the bias is now to the upside as copper has led the sector higher. Stimulus and weakness in the US dollar underpin the price of nickel as we head into the second half of 2020.

The decline in the value of currencies could cause some inflationary pressures that could boost the price of nickel. Three-month nickel forwards closed Q2 at $12,837 per ton, at just above the midpoint of the trading range in 2020, which was from $11,142 to $14,360 per ton. Nickel did not venture outside of the trading band in Q2. Demand from electric cars is supportive of the price of the nonferrous metal, but the global pandemic will continue to be the most significant issue facing all markets. Nickel is likely to continue to follow copper’s lead.


The price of lead fell 4.02% in 2019. In Q1, lead forwards were the best performing metal on the LME with an 11.23% loss. In Q2, three-month LME lead forwards moved 4.83% higher and closed on June 30, 2020, at $1,801.50 per ton. Lead was 6.95% lower over the first six months of 2020.

Demand for batteries around the world is supportive of the price of the toxic base metal. China is, by far, the world’s largest producer and consumer of lead and the biggest player in the market, which lends the price of the metal to price manipulation. The Chinese anti-pollution policies have increased the demand for electric automobiles, which is supportive of the price of lead. There is some degree of correlation between the price of oil and lead as higher oil prices increase the demand for electric vehicles and falling oil prices do the opposite. Crude oil tanked in Q1, which weighed on lead as the virus and risk-off conditions were overwhelming. The energy commodity rebounded to the $40 per barrel level at the end of Q2, which helped lead to post a gain for the quarter. Economic expansion or contraction around the globe will be the most significant factor for the price of lead in Q3 and beyond. On a longer-term basis, lead is a promising metal because of its consumption in batteries, a global market that continues to grow.


Zinc moved 6.53% lower in 2019. In Q1, the price of zinc declined by 17.93%. In Q2, the price rebounded by 9.98% and was 9.74% lower over the first half of 2020. Three-month zinc forwards on the LME closed at $2067.00 per ton on June 30, 2020. After achieving a multiyear high in February 2018, the price of zinc moved steadily lower on the back of increasing stockpiles, and weak Chinese demand. Supplies of zinc concentrates have been rising because of high prices last year. New production from China and Peru weighed on the price of zinc, and lower demand because of escalating trade tensions had sent prices significantly lower. The zinc market had been tight because of depleted mine supply, but higher prices brought new production to the market, and the $2500 per ton level, which has become a significant pivot point for the metal gave way. In Q1, the global pandemic sent the price below $2000 per ton, which was a level of technical and psychological support. In Q2, zinc traded on either side of the $2000 per ton level, which has become the new pivot point for the nonferrous metal.

The fundamentals for zinc shifted with new production at higher prices, and we witnessed a shift in the production and pricing cycles in the zinc market. Coronavirus hit all of the base metals in Q1, and the zinc market was no exception. In Q2, zinc followed copper and the other metals as they recovered as it cut its loss for the year to under 10%.


In 2019, the price of tin moved 13.26% lower. In Q1, tin added to the losses with a decline of 14.78%, but in Q2, the price moved 16.93% higher and was only 0.43% lower since the end of 2019. Tin was the second-best performing base metal on the LME in Q2.

China is the world’s largest producer and consumer of tin. Indonesian output is on the decline, but in other areas of the world, it has risen. Above $20,000 per ton, things got dicey for tin throughout 2017, but economic growth in China provided stability and support for the price. The $20,000 had become the pivot point for the price of three-month tin forwards. In 2019, the price moved away from the level on the downside. In Q1, tin dropped below the $15,000 level, but it recovered in Q2. Three-month tin forwards on the LME closed at $16,777 per ton on the final day of June.

The bottom line:

Base metals and industrial commodities are heading into the second half of 2020 after recovering from the worst period since 2008 and perhaps the 1930s when it comes to the overall economy. The world remains at war with an invisible and microscopic enemy at the end of Q2. The virus does not discriminate because of nationality and borders, race, religion, wealth, sexual orientation, or political ideology. Coronavirus is a reminder that all of the people on the planet are in the same boat when it comes to battling a health emergency. The impact on markets has been dramatic, but it is only a symptom of the global pandemic. Central banks and leaders can treat the effects of the virus, but the answer to the crisis is in the hands of scientists looking for effective treatments and a cure and the health professionals who are selflessly treating the ill. The global supply chain continues to provide essentials to people around the globe, but the economic fallout will be substantial. The longer the virus remains out of control and spreads around the planet like wildfire, the higher the financial cost. However, life comes first, and the economic factors a distant second. The stimulus stabilized the situation in Q2 and led to recoveries in all of the base metals, which posted across the board gains. If 2008 is a model for 2020, prices could continue to move higher over the coming months and years.

At the end of Q4 2019, I wrote, “Any risk-off period during 2020 has the potential to cause selling in this sector of the commodities market.” No one expected a risk-off period caused by a virus, which has become the most significant black swan event of our lifetime. Fundamentals and technical factors will continue to take a backseat to the progression of the virus in the short-term. However, price cycles will eventually lead to price bottoms. As production grinds to a halt in an environment of collapsing prices, inventories will begin to fall, leading to price bottoms. The world will emerge from the ashes of Coronavirus, and base metals are the building blocks of infrastructure. The cure for low prices in commodities is low prices.

Each non-ferrous metal traded on the London Metal Exchange has different supply and demand fundamentals. Some of the metals were in deficit, and some had surplus inventories when the pandemic emerged.

The price of iron ore, the main ingredient in steel, jumped 32.27% higher on the back of supply shortages from Brazil in 2019. In Q1, nearby iron ore futures fell 9.66%. In Q2, they rallied by 19.05% and were 7.56% higher over the first six months of 2020. Nearby iron ore futures finished Q2 at $98.45 per ton. Iron ore is the primary ingredient in the production of steel. U.S. Steel (NYSE: X) stock was trading at $7.22 per share compared to $6.31 at the end Q1; the stock almost halved in value in Q1 and made a marginal recovery in Q2. X shares had lagged the stock market in 2019 and continued to underperform the leading indices during the price carnage in late February and March 2020 and throughout Q2.

The Baltic Dry Index moved 14.24% lower in 2019. In Q1, the BDI fell 49.72%. In Q2, it exploded 227.37% higher. Even though the BDI experienced seasonal weakness during the winter months, the deflationary spiral and halt of economic activity weighed on the BDI and freight rates at the end of Q1. The index that represents the freight rates for shipping dry bulk commodities around the world is often a sign of demand for commodities. China is the most influential factor when it comes to moves in the BDI as it is the 800-pound gorilla when it comes to the demand side of the fundamental equation in the raw materials market. New restrictions on cleaner fuels boosted shipping rates and the BDI in 2019. The BDI closed Q2 at the 1794 level. The level of the BDI is a promising sign of emerging demand for the commodities asset class.

The global pandemic has changed the world from a short-term perspective, but the impact will last long after scientists discover effective treatments and a vaccine. The bottom line for base metals and other commodities is that we will feel the effect for years to come. While the deflationary spiral was bearish for prices, unprecedented levels of fiscal and monetary policy stimulus could cause inflationary pressures. At the same time, as the contraction leads to lower levels of output of all of the base metals, inventories will decline, and prices should find bottoms. We could be in for very volatile price action for the foreseeable future. As we head into Q3, the downward spiral took a pause, and prices recovered. I continue to expect volatility in this sector throughout the rest of 2020 and over 2021 and 2022.

Source: Barchart

DBB is the ETF product that tracks the base metals sector. DBB moved from $12.35 at the end of Q1 to $13.61 at the end of Q2 2020. DBB rose by 10.20%. The product tracks the price action in the copper, aluminum, and zinc markets. DBB does not list lead, nickel, or tin LME forwards in its top holdings, as the prospectus says, “The index Commodities consists of aluminum, zinc, and copper-Grade A.”

DBB has net assets of $87.62 million, trades an average of 80,787 shares each day, and charges a 0.75% expense ratio.

Expect lots of price volatility in the base metals and industrial commodity sector of the commodity market over the coming quarter and beyond. While economic contraction was bearish for prices earlier this year, inflationary policies to combat the financial symptoms of the pandemic and a significant decline in production could give way to lots of two-way price volatility. Keep those stops tight and take profits when they are on the table. Markets rarely move in a straight line, which creates an environment where trading opportunities to increase. The current market conditions continue to favor trading rather than any medium or long-term positions.

A far more robust and comprehensive report on base metals and industrial commodities is available to subscribers to The Hecht Commodity Report.

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.

The Hecht Commodity Report is one of the most comprehensive commodities reports available today from the #2 ranked author in both commodities and precious metals. My weekly report covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. I just reworked the report to make it very actionable!

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