Base metals could be the big post-trade war play

Base metals such as iron ore, copper nickel and aluminium could become the big bullish trade story when US-China trade talks are resolved. Get ahead of the curve.

IG Analyst

Publication date : 2018-09-19T15:53:38+0100

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Base metals have been one of the major casualties of US President Donald Trump’s trade war, with fears over the future of trade relations and economic growth hitting both demand and market expectations for prices. China remains the key driver for demand, and markets remain hugely reliant upon economic indicators from the world’s second biggest nation as a driver of sentiment in the commodity sphere. The so-called ‘Dr Copper’ remains the bellwether for global economic health and expansion, yet, when considering that China consumer over half of the world’s copper, it is clear that the Chinese economy is essentially the bellwether for global growth. With the breakdown in trade knocking Chinese growth prospects, it comes as no surprise that we have seen the price of base metals suffer throughout 2018.

The phrase base metals typically refers to the metals that are not perceived as ‘precious’, thus ruling out the likes of silver and gold. They typically have a range of commercial and industrial uses, so the demand for them will tell you a lot about the degree at which economic growth is occurring. Some of the most commonly traded base metals include iron, copper, nickel, aluminium, zinc and lead.

Copper and iron ore are probably the two most dominant base metals, given their widespread use. Copper is used heavily within electronics, while iron ore is used to create steel, which is used heavily in construction.

The deterioration in copper, iron ore, nickel and aluminium prices throughout 2018 are highlighted in the chart below. One thing that is stark is the fact that iron ore was the first to suffer heavily, losing 20% over the first three to four months of the year. This was not the case for the others, with nickel actually gaining 20% in the four months to April. However, we are now seeing that trend reverse, with a convergence that has seen a steep decline in copper, nickel and aluminium, while iron ore regain lost ground.

Base metals in 2018

Base metals in 2018

Base metals in 2018

This week’s decision to ramp up tariffs between the US and China highlights that the trade war issues are not going away anytime soon. With that in mind it makes sense to expect more of the same, with base metals in the limelight as one of the prominent victims of the trade war. However, there is a case to be made that the decline in these markets could provide a longer-term buying opportunity when normality resumes. That may seem far off, but traders should be aware of this possibility ahead of the rebound. With markets typically moving ahead of an announcement rather than waiting for it to happen, a gradual shift towards a resolution between the US and their Chinese counterparts will likely spur on a round of buying in these metals.

Looking at the chart below, we can see that iron ore prices have been gaining ground over the past six months, bringing us back into trendline resistance. The wider context does highlight the possibility of a bearish reversal from here, with the 61.8% Fibonacci level providing greater confidence that the sellers will come in once more.

Iron ore daily chart

Iron ore daily chart

Iron ore daily chart

On the copper front, we can see a clear breakdown in price throughout the year thus far, with the break through the lower boundary of an Andrew Pitchfork providing a pronounced period of downside. However, this week we have seen a significant rebound, bringing about the possibility of a fight back.

Copper weekly chart

Copper weekly chart

Copper weekly chart

The daily chart highlights this move, with the crucial 6167 level coming into play. A break above there would provide a shift in sentiment, pointing towards a greater possibility of upside. Until then, watch for this resistance level to potentially hold to continue the recent consolidation.

Copper daily chart

Copper daily chart

Copper daily chart

In summary, while the trade war could carry on for some time longer, the likely positive resolution means that the long term looks bright for base metals. However, for now there is a strong chance we will continue to see these metals decline as the wider economic picture slows in China.

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