The base metals sector rallied 17.26% in Q4 but was 6.16% lower in 2022, but many of the metals rose to multi-year, with some trading at record highs last year. In Q1 2023, the base metals sector posted a 2.91% decline.
Copper, aluminum, and tin prices increased, while nickel, lead, and zinc fell, with nickel posting the most significant loss. In my January 5 Barchart article, I wrote:
As we move into 2023, the short-term path of least resistance in the base metals is higher. Many of these metals are critical for green energy initiatives, which will likely support the prices. Moreover, as China emerges from its COVID-19 lockdowns and protocols, economic growth in the world’s leading base metals-consuming country could cause rallies. I am bullish on the prospects of the nonferrous metals sector heading into 2023. Prices were slightly lower during the first week of the new year.
The sector moved lower in Q1 2023 thanks to nickel’s over 20% decline, but the leading metals, copper and aluminum, posted gains.
Copper and aluminum rally in Q1 2023
Copper led the base metals sector in Q1 2023 with over 7% gains in the COMEX futures and the London Metals Exchange three-month forwards. In 2022, COMEX copper fell 14.63% despite rising to an all-time $5.01 per pound high in March 2022. LME forwards dropped 13.87% in 2022, even though the price peaked at a record $10,845 high in March.
The chart highlights the 7.45% rise in nearby COMEX copper prices in Q1 2023, with the base metal settling at $4.0945 per pound on March 31, 2023. Copper was in the middle of the trading range from the March 2022 $5.01 high to the July 2022 $3.15 per pound low.
LME three-month copper forward prices rose 7.42% in Q1 2023, settling at $8,993 per ton. COMEX and LME futures were slightly higher on April 14, at the $4.1065 and $9,023.50 levels, respectively.
LME aluminum forwards declined 15.30% in 2022, but the metal reached a $4,073.50 record high in March 2022.
LME three-month aluminum forwards edged 1.47% higher in Q1, settling at $2,413 per ton on March 31, 2023. The price was lower at the $2,385.50 level on April 14, 2023.
Nickel leads the way lower- Zinc continued to decline
Nickel is a thinly traded LME metal, leading to wild price swings. In 2022, three-month nickel forwards led the sector on the upside with a 44.76% gain. A scandal caused the price to soar to over $100,000 per ton when a dominant Chinese market participant with a short position had to cover the risk position. However, the LME adjusted the market high to limit the losses. The leader in 2022 became the laggard in Q1 2023.
The chart illustrates the 20.67% decline in LME three-month nickel prices in Q1 2023, with the forwards closing at $23,838 per ton on March 31. Nickel forwards were higher at the $24,132 per ton level on April 14.
Three-month zinc forwards were 15.89% lower in 2022, and the selling continued in Q1 2023.
Zinc forwards closed Q1 at $2,922.50 per ton, down 1.68%. Zinc was lower at $2,873.75 on April 14.
Lead declined and was the second leading loser in Q1, while tin rallies
Lead, the toxic metal critical for battery production, moved only 0.48% lower in 2022.
The chart illustrates lead’s 8.11% decline to $2,107 per ton in Q1, making it the second worst-performing base metal. Lead’s price was higher at $2,170 on April 14.
Tin prices were the worst-performing LME metal in 2022, posting a 36.16% decline. While nickel is thinly traded, tin is the least liquid LME metal, leading to high price variance.
Three-month LME tin forwards rallied 4.14% in Q1, settling at $25,835 per ton on March 31, 2023. Tin was lower on April 14 at the $24.308 level.
LME stocks- A mixed picture
In Q1, LME copper stocks fell 24,200 metric tons or 27.2% to 64,725 tons on March 31, 2023. LME aluminum inventories moved in the opposite direction, increasing 70,600 metric tons or 15.7% to 450,300 tons at the end of Q1.
LME zinc stocks rose 13,050 tons or 40.7% in Q1 and stood at 32,025 tons on March 31. Nickel inventories moved 11,112 tons lower. The 20.0% decline left the stockpiles at 55,476 metric tons at the end of Q1.
Lead inventories on the LME rose 1,225 tons or 4.9% in Q1 to 25,150 metric tons. Tin stockpiles dropped 21.6% or 645 tons to 2,990 tons from the end of 2022 through March 31, 2023.
While LME inventories were a mixed bag in Q1, many metals have experienced significant stockpile declines over the past years, tightening the fundamental supply and demand balances. Since LME metals are critical for alternative energy initiatives, the stockpile declines are significant support prices.
DBB outperforms the base metals sector in Q1
The Invesco DB Base Metals Fund (DBB) owns a portfolio of the most liquid LME metals, including aluminum, copper, and zinc. DBB’s fund summary states:
At $19.99 on April 14, DBB had $223.104 million in assets under management. DBB trades an average of 262,835 shares daily and charges a 0.77% management fee.
In Q1 2023, the base metals sector fell 2.91%. While copper and aluminum prices moved to the upside, zinc declined.
The chart shows the move from $19.45 on December 30, 2022, to $20.20 per share on March 31, 2023, a 3.86% gain. DBB underperformed copper but outperformed zinc and the overall sector in Q1. At $19.99 on April 14, DBB was slightly lower, reflecting the declines in aluminum and zinc forward markets since the end of Q1.
Base metals are crucial for climate change initiatives batteries, and other green energy products require the metals that replace traditional fossil fuels. Low historical stockpiles have caused miners to scramble to increase production, but it takes years and considerable investments to bring new mines into production. Higher financing costs as interest rates rise cause the cost of production to rise. Moreover, China is the leading base metal consumer. As China emerges from its COVID-19 protocols, the demand will likely increase. I am bullish on the base metals sector and view the selloffs as buying opportunities for the future. However, picking bottoms is always challenging in the volatile commodities asset class. I will leave plenty of room to add on a scale-down basis on further declines.
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