COM - DBB: Aluminum Zinc And Copper In 2024

2023-12-26 14:11:06 ET

Summary

• U.S. interest rates rose to the highest level since 2007, supporting a rally in the U.S. dollar index.
• High interest rates and a strong U.S. currency weighed on base metals prices.
• There are compelling reasons for higher base metals prices in 2024, including falling U.S. interest rates and a weaker U.S. dollar.
• Invesco DB Base Metals Fund ETF is the base metals ETF reflecting the performance of copper, aluminum, and zinc prices.

In October 2023, U.S. interest rates rose to the highest level since 2007, when the U.S. 30-year Treasury bond (US30Y) futures fell to 107-04.

The chart highlights the plunge to a sixteen-year low. Higher interest rates supported a rally in the U.S. dollar index (DXY).

The dollar index rose to 107.35 in early October 2023. High interest rates and a strong U.S. currency weighed on base metals prices. The interest rates increased the cost of carrying inventories, and base metals tend to decline when the U.S. dollar, the world's reserve currency, rallies. Meanwhile, economic weakness in China, the world's leading base metals consumer, added to base metal sector selling.

As we move into 2024, there are compelling reasons for higher base metals prices, which were attractive at the levels on December 22. The Invesco DB Base Metals Fund ETF ( DBB ) owns a portfolio of the most liquid base metals trading on the London Metals Exchange.

Copper is the leading base metal trading on the LME

While copper is not the most liquid LME metal in volume, it is the undisputed leader of nonferrous metals. While copper has idiosyncratic supply and demand fundaments, the path of least resistance of copper prices tends to influence aluminum, nickel, lead, zinc, and tin prices. China is the demand side of the base metals equation.

The chart shows that the world's second-leading economy accounts for more than half the world's annual copper demand. Therefore, copper is extremely sensitive to the Chinese economy.

As of December 22, LME three-month copper forwards were 2.4% higher in 2023, from $8,372 at the end of 2022 to $8,573.50 per metric ton.

While the other base metals tend to follow copper prices, 2023 was different as the most liquidly traded LME metals, aluminum and zinc, declined.

Aluminum prices have declined in 2023

In March 2022, Russia's invasion of Ukraine that threatened worldwide aluminum production, refining, and supply chains pushed three-month LME aluminum forwards to $4.073.50 per ton, a record high.

In 2023, aluminum forwards traded in a $2,109 to $2679.50 range, with the high in January and the low in December. Aluminum forwards closed 2022 at $2,378 and were 2.2% lower at $2,326 in late December. China is the world's leading aluminum-consuming country, accounting for more than 40% of annual consumption.

Zinc prices have fallen by over 12%

Zinc is also a highly liquid LME metal. Zinc prices (LMZSDS03:COM) reached a multi-year high in April 2022.

The chart highlights the rise to $4,563.05 per ton, just shy of the 2006 record $4658 per ton peak. Zinc closed 2022 at $3,003.25 and was 12.9% lower at $2,588.25 in late December.

In a June 2023 Reuters article , Macquarie analyst Alice Fox pointed out, " If the (zinc) price go back below $2,400 a ton for a sustained period then we could see more ( MINE ) closures ." Therefore, $2,400 could be a floor for zinc during the coming year. China is a leading zinc-consuming country.

The compelling reasons to consider adding the most liquid base metals to your portfolio

The following factors favor copper, aluminum, and zinc prices in 2024:

• Falling U.S. interest rates and a weaker U.S. dollar support higher commodity prices, and base metals are no exception.
• The Chinese economy was weak throughout 2023. Any improvement in 2024 could cause base metals prices to surge.
• The bifurcation of the world's nuclear powers disrupts trade and supply chains. Base metals exploded higher when Russia invaded Ukraine. Therefore, any geopolitical events that increase hostilities or new conflicts could cause base metals to rally.
• After moving appreciably higher in 2021, base metals prices corrected lower in 2022 and 2023. Prices have declined to levels that will likely find solid support.
• Commodities tend to fall to levels where inventories decline, production slows, and consumption increases at lower prices. Copper, aluminum, and zinc could be near the lows of their price cycles.
• Inflation continues to push production costs higher, meaning producers need higher prices for output to continue.

Risk-reward favors the upside for copper, aluminum, and zinc. Copper is the leading base metal, and mining legend Robert Friedland , founder and chairman of Ivanhoe Mines, recently said:

" We probably need about $15,000 a ton, stable for a long period of time, before the industry can really gear up and build those giant (copper) mines ."

With copper at around the $8,600 per ton level, Mr. Friedland believes a rally of over 70% is needed to spur significant new output. Copper is critical for green initiatives, so the demand will rise over the coming years. If copper takes off on the upside, the base metals will likely follow, taking aluminum and zinc prices along for the bullish ride.

DBB has exposure to the three base metals

At $18.07 per share, the Invesco DB Base Metals Fund had over $119.7 million in assets under management. DBB trades an average of 147,006 shares daily and charges a 0.77% management fee. The top holdings of DBB on December 20, 2023, included:

The chart shows that DBB invests 100% of its assets in copper, aluminum, and zinc, in primarily equal allocations.

The chart shows that DBB rose to a record $29.70 high in May 2007 and made a lower $27.01 high in March 2022. DBB fell 7.1% from $19.45 at the end of 2022 to the $18.07 per share level.

If the Chinese economy improves, lower U.S. interest rates and a weaker U.S. currency could cause a perfect bullish storm for base metals. Invesco DB Base Metals Fund ETF's technical support is at the May 2023 $17.40 low, with resistance at the January 2023 $22.34 high. DBB could have upside potential for the coming year.

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