Base Metal ETFs Buck Commodity Swoon

August 24, 2017

There's a bewildering rally taking place within the commodities markets, and few on Wall Street are buying it. Base metals, a group that includes everything from copper to zinc to aluminum, have shot higher in 2017 despite a relatively dismal year for the broader commodity market.

The PowerShares DB Base Metals Fund (DBB), which holds an equal-weighted basket of all three metals, has jumped 20.8% year-to-date, handily outperforming the 6.9% loss for the broad PowerShares DB Commodity Index Tracking Fund (DBC), the 13.3% swoon for the PowerShares DB Energy Fund (DBE) and the 7.4% decline for the PowerShares DB Agriculture Fund (DBA).

 

YTD Returns For DBB, DBC, DBE, DBA

 

Factors Driving Rally

Analysts attribute the base metals rally to a few factors, including rebounding growth in China and a weaker U.S. dollar.

GDP in China expanded by 6.9% during the first half of 2017, outpacing the government's target of 6.5% and even last year’s 6.7% growth rate. Meanwhile, the U.S. Dollar Index has slid 8.7% so far this year.

But those bullish factors aren't unique to base metals. Other commodities would seemingly benefit from a stronger Chinese economy and sliding greenback, but they haven't. That means it may be the supply side that's really powering metals higher.

"Our view is that there are several separate factors at play accelerating the metals' price boom. Demand conditions within China are supportive and the dollar has weakened,” said Dane Davis, commodities research analyst for Barclays. “That helps, but it’s not enough. What’s turbo-charging some metals are supply disruptions and tightness. Copper, for example, has seen disruptions ranging from weather to strikes, cutting 612 kt [612,000 metric tons] of production so far in 2017."

 

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