Base Metal Mania
You may have noticed precious metals have been in somewhat of a funk over the last several weeks.
What you may not know is that industrial metals — like steel and copper — have been tearing higher.
One word: Infrastructure!
The American Society of Civil Engineers (ASCE) issued a warning: The U.S. needs to invest $4.5 trillion in infrastructure by 2025 to avoid “serious economic consequences.” This is an issue that Washington is going to have to grapple with — by spending money on all sorts of infrastructure projects.
And the metal best positioned for this infrastructure boom?
As economic sentiment mends, the U.S. housing market is strengthening. At the same time, declining mortgage rates are making homes more affordable.
All this is boosting demand for steel used in home construction.
Plus, the “phase-one” trade deal between the U.S. and China last December also helps long-term prospects for steel use.
What’s China have to do with it? Well, China’s steel demand is HUGE.
In 2019, China produced 993 million metric tons of steel and consumed 95%. So, China consumes more than half of all the world’s steel production.
And that has an impact on more than just steel. All that steel must be manufactured using iron, coking coal and small amounts of magnesium. And when you make stainless steel, you need to add chromium.
Interestingly, China’s factory output rose faster-than-expected in October, up 6.9% from a year earlier.
One major area of growth for China going forward is automobiles. The pandemic suppressed demand, and now growth could be explosive. China’s auto sales grew 12.5% in October.
You know what car manufacturers use a lot of? Steel! As well as copper, aluminum and more. Basically, it’s boom times for industrial metals.
“A combination of global price hike, supply correction that has happened overall in the system and pent-up demand as several segments are trying to make up for the lost quarters”, said Jayant Acharya of India’s JSW Steel.
Steel futures are up a stunning 51% since July, after selling off with most other markets as pandemic fear gripped the markets in March.
When a cyclical industry goes through a downturn, many companies simply hunker down.
One way to play this trend is with the VanEck Vectors Steel ETF (NYSE: SLX, Rated C-). SLX seeks to replicate the price and yield performance of the NYSE Arca Steel Index (STEEL), which tracks the overall performance of companies involved in this sector.
And don’t forget about the SPDR S&P Metals and Mining ETF (NYSE: XME, Rated C-), which tracks the performance of the S&P Metals & Mining Select Industry Index.
Both funds are leaving the S&P 500 in the dust. Here’s a performance chart, tracking all three since the lows in March.
Sure, a rally of 101% is a lot. But in a big bull market, stocks and funds can rally a lot more than that. Bottom line: Pullbacks can be bought.
And don’t give up on gold and other precious metals. Because this downturn is only setting up the next leg higher!
All the best,