Base Metal ETFs Buck Commodity Swoon

August 24, 2017

‘Tightening Environmental Controls’

Robin Bhar, head of metals research for Societe Generale, also sees the industry as getting a supply-side lift from environmental reforms in China.

"Supply-side reforms in China are a key factor" driving the rally, he noted, adding: "Tightening environmental controls/monitoring of mines and smelters (mainly aluminum and zinc) are constraining output. In aluminum, smelting capacity is being forced to close if it doesn’t have the necessary licenses from the central government."

While analysts largely agree on what's driving metals higher, they're split over whether the rally will continue. Most agree with Barclays’ Davis, who noted that "something seems off about this recent rally" and that he remains "skeptical of its strength and duration."

Keep An Eye On Iron Ore

Davis is especially wary of iron ore, a key ingredient in making steel. The steel market is running very hot at the moment in China, but that will likely change relatively soon, he says.

"While demand conditions are supportive in the short term, they’re running up against long-term head winds, including a China that is facing demographic pressures of a slowdown," Davis predicted.

Meanwhile, Bernard Dahdah and Alomgir Miah, analysts at Natixis, also believe the rally will run out of steam soon.  

"Although in the long run we are bullish on copper and aluminium, we believe in the short to medium term they have overshot where they should be fundamentally due to the excitement of better- than-expected demand indicators in China," they said. "We expect prices for both metals to fall in Q4'17 after the end of leadership elections in China."

On the other hand, Societe Generale's Bhar believes there is ample support for a continued rally in base metals.

Though nickel in particular looks overvalued, "base metals overall from a supply/demand perspective are in better balance and inventories are falling," he said.

In Bhar's view, the base metals uptrend is sustainable through the end of the year, but the situation gets murkier in 2018 when he anticipates China's economy will slow.

Contact Sumit Roy at [email protected].

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