Base metals were the second worst-performing sector of the commodities market in Q2 2023. While a composite for 29 raw material futures and forward markets in the U.S. and the U.K. edged 0.21% higher from March 31 through June 30, 2023, base metals fell 7.51% and were 9.94% lower over the first half of this year. Five of the six base metals fell in Q2 and over the first six months. LME tin was the only metal that moved to the upside in Q2 and since the end of 2022.
LME zinc three-month forwards were the worst-performing base metal in Q2, followed by LME three-month nickel and LME aluminum forwards. Zinc, nickel, and aluminum posted double-digit percentage losses in Q2, while zinc and nickel were down more than 10% since the end of last year.
LME Tin leads the way on the upside- Lead edges lower in Q2
LME three-month tin forwards were the only base metal to move to the upside in Q2 2023.
The chart highlights the 3.68% Q2 gain and 7.98% increase since the end of 2022 as of June 30, 2023. LME tin settled at $26,787 per ton at the end of Q2. Tin is the least liquid base metal and the leader of the pack in Q2 and 2023.
LME three-month lead forwards edged only 0.36% lower in Q2.
Lead forwards were 8.44% lower than the December 20, 2022, closing price on June 30 at $2,099.50 per ton.
Copper fell in Q2 but has been steady since the end of last year
Copper is the leading base metal, trading on the LME and in the futures arena on the CME’s COMEX division. LME copper three-month forwards fell 5.31% in Q2.
The chart highlights the Q2 decline in LME copper forwards. Meanwhile, the red nonferrous metal was 1.71% higher than the December 30, 2022, closing level on June 30. LME copper forwards settled at $8,515.50 per ton at the end of Q2.
The futures chart shows an 8.63% Q2 decline and a 1.82% drop in copper’s price since the end of 2022. Nearby COMEX copper futures settled at $3.7410 per pound on June 30.
Zinc, nickel, and aluminum fall
Three-month LME zinc forwards led the way on the downside in Q2 with an 18.29% loss. Zinc declined 19.66% over the first half of the year, settling at $2,388 per ton on June 30. Zinc suffered the second-worst loss in the sector since the end of last year.
While LME nickel forwards posted the second-worst performance in Q2 with a 13.94% decline, they were the downside leader over the first half of this year with a 31.72% loss. Three-month nickel was at the $20,516 per ton level on June 30, 2023.
LME high-grade aluminum three-month forwards fell 10.84% in Q2 and were a 9.52% loser over the first six months of 2023. LME aluminum settled at $2,151.50 per ton at the end of Q2. Zinc, nickel, and aluminum posted double-digit percentage declines from the end of March through the end of June.
LME stock changes in Q2 and since the end of 2022
LME stockpiles can provide insight into nonferrous metal fundamentals. Since the end of Q1 2023, inventory changes were as follows:
- LME copper stocks rose 12.75%
- LME aluminum inventories increased by 4.27%
- LME nickel stockpiles fell 12.42%
- LME lead stocks rose 56.30%
- LME zinc inventories exploded 79.41% higher
- LME tin stockpiles rose 48.83%
Zinc is a highly liquid base metal, and the significant inventory increase weighed on zinc’s price, causing it to experience the most significant percentage decline in Q2.
Since the end of 2022, the stockpile changes were:
- LME copper stocks fell 17.90%
- LME aluminum inventories rose 20.62%
- LME nickel stockpiles moved 30% lower
- LME lead stocks increased 63.92%
- LME zinc inventories soared 152.4%
- LME tin stocks moved 16.72% higher
Zinc stocks exploded higher over the first six months of 2023. Rising interest rates increase the cost of carrying base metals and other industrial commodities and can cause a decline in economic growth. Weakness in nonferrous metals prices was a function of higher rates.
The prospects for base metals over the coming months
Copper and base metals are critical inputs in decarbonization. As the U.S. and Europe address climate change, shifting from hydrocarbons to alternative and renewable energy sources, base metals demand will increase.
Meanwhile, China is the world’s leading industrial commodity consumer, and base metals are no exception. Base metals prices are a barometer of Chinese economic growth. In Q2 and throughout 2023, the Chinese economy has been weak. However, as China emerges from COVID-19 protocols and its economy gets back on track, base metals demand will likely increase, supporting prices. Therefore, as the markets head into the second half of 2023, the declines could mean base metals are closer to bottoms than tops, and we will look back at the current price levels as bargains. I favor a scale-down buying approach to copper and the other leading base metals, leaving plenty of room to add on further declines.
The Invesco DB Base Metals Fund (DBB) holds long positions in the three most liquid LME metals, zinc, aluminum, and copper. At $17.95 per share on June 30, DBB had $166 million in assets under management. DBB trades an average of 93,410 shares daily and charges a 0.77% management fee.
The chart illustrates the 11.1% drop in DBB in Q2 and the 7.71% decline since the end of 2022 as of June 2. At below $18 per share, DBB offers value for market participants that believe the Chinese economy will rebound and green initiatives will boost base metals prices over the coming months and years. I favor a scale-down buying approach for the DBB ETF which was lower in early Q3.
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