Has North Korea triggered a metal commodities rally?

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By Shekhar Ghosh

Major U.S. and global indices slid for a second straight week as the sabre rattling continued between the US and North Korea.

The S&P 500 Index fell 1.5 per cent on Thursday last week, its largest one-day decline since May. Military stocks led by Raytheon, Lockheed Martin and Northrop Grumman, however, were up.

As expected, when a war looms, gold prices go up. The yellow metal finished the week just under $1,300, a level not seen since November 2016. Speaking to CNBC last week, commodities expert Dennis Gartman, editor and publisher of the widely-read Gartman Letter, said that he believed “gold is about to break out on the upside strongly” in response to geopolitical risks and inflationary pressures. Gartman thinks investors should have between 10 and 15 percent of their portfolio in gold.

Like stocks, the U.S. dollar too continued its slide last week. This has lent support not just to gold but also commodities, specifically industrial metals. The Bloomberg Commodity Index actually beat the market in July, the first time it’s done so this year.

Six metals — aluminium, copper, zinc, gold, silver and nickel — have been the top drivers of performance this year, thanks to a weaker dollar, China’s commitment to rein in oversupply and heightened demand. According to Bloomberg, an index of these six raw metals has jumped to its highest in more than two years. Some market observers believe this is only the beginning. Some analysts believe that metals “are now in a bull market.”

Aluminium, the top performer

The top performer right now is aluminium, up more than 20 percent year-to-date. Last week it breached $2,000 a tonne for the first time since December 2014 and is currently trading strongly above its 50-day and 200-day moving averages.

Demand for aluminium is growing in the automotive and packaging industries, its two key markets. With consumers and governments demanding better fuel efficiency, automakers are increasingly turning to aluminium, which is around 40 percent lighter than steel. It is believed that the amount of aluminium used to build each new vehicle has more than doubled in the last 20 years. Airline manufacturers such as Boeing and Airbus are also expected to increase demand for the lightweight metal.

Supply-side conditions are also improving. Prices have struggled in recent years as China—which accounts for roughly 40 percent of world output—flooded the market with cheap, and often illegal, metal. Recently, however, the Asian giant has called for dramatic capacity cuts in a number of provinces. By the end of 2017, an estimated 4 million metric tons of capacity will have closed, or one-tenth of the country’s total annual output.

Also supporting prices is the U.S. Commerce Department’s decision last week to slap duties on aluminium coming into the U.S. from a number of Chinese producers that were found to be heavily subsidized by the Chinese government.

The shift in sentiment is also evident in increase in mining activity as producers take advantage of higher prices. Bloomberg reported last week that the number of new holes drilled around the globe has accelerated for five straight quarters as of June.

As China pursues further large infrastructure projects, US is trying to focus on infrastructure spending as well, and developing countries focusing back on infrastructure development, consumption of raw materials such as aluminium, copper, zinc and other base metals are bound to increase.

Perhaps Kim Jong’s threats have indeed ushered in a new commodities supercycle.

 

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