DBB - DBB Falls - Time To Put The ETF On Your Investment Radar

2023-08-22 13:15:15 ET

Summary

• London Metals Exchange (LME) is the global hub for base metals trading, with China being the leading consumer of these metals.
• Copper, aluminum, and zinc prices have been declining in recent weeks and months.
• The Invesco DB Base Metals Fund tracks a portfolio of the most liquidly traded LME metals and presents an opportunity to invest in these metals at current price levels.

The London Metals Exchange is the hub of global base metals trading. China is the world's leading consumer of the metals that are the building blocks of infrastructure and are increasingly critical for worldwide green energy initiatives. The LME trades copper, aluminum, nickel, lead, zinc, and tin. The exchange also offers ferrous metals contracts.

In 2012, the Hong Kong Exchanges and Clearing bought the LME for $2.15 billion after a bidding war with other exchanges, including the U.S.-based Chicago Mercantile Exchange and Intercontinental Exchange. China's significant footprint in the base metals business created the most synergies for the LME, established in 1877.

The most liquidly traded base metals on the LME are copper, aluminum, and zinc. The Invesco DB Base Metals Fund (DBB) tracks a portfolio of the three metals. Copper, aluminum, and zinc prices have declined over the past weeks and months.

Copper failed at $4 and is trending lower

Copper is not the most liquidly traded base metal, but the red metal is the bellwether for the nonferrous sector on the London Metals Exchange. Copper prices have been under pressure since failing at the $4 per pound level on the final day of July and the first day of August 2023.

The chart shows the pattern of lower highs since the January 18, 2023, $4.3440 high for this year. The most recent failure at the $4.0240 level took September COMEX copper futures 9.9% lower to $3.6270 on August 17. At the $3.7545 level on August 22, copper futures remain under selling pressure and closer to the August 17 low than the $4 level. COMEX copper's trend remains bearish in late August 2023.

The chart of three-month copper forwards on the London Metals Exchange highlights the bearish pattern in the world's leading physical copper market. LME forwards fell 8.3% from $8,860 on August 1 to $8,120 on August 17 and were below the $8,274 level on August 21. LME forwards have followed the same bearish path as the COMEX copper futures in 2023.

Aluminum prices have been in a bearish trend since soaring in 2022

While copper is the leader of the LME metals, aluminum is the most liquid nonferrous metal. LME three-month aluminum forwards reached a $2,679.50 2023 high in mid-January.

The chart shows a 20.6% decline to $2,127 on July 7. Aluminum forwards recovered to $2,289 on July 31, but at the $2,144 per ton level on August 22, aluminum forwards fell 6.3% and remained near the recent low and in a bearish trend.

Zinc prices have followed aluminum and copper

Like aluminum, zinc is a liquid LME nonferrous metal. Zinc inventories have exploded higher since the end of last year. On December 30, 2022, LME zinc stocks were at 32,025 metric tons. On August 21, they had increased 356% to 145,975 tons.

The chart illustrates the three-month zinc forward market's bearish trend in 2023. Prices fell from the $3,500 level in early 2023 to $2,222 per ton in late May. Most recently, zinc fell 9.9% from $2,553 on August 1 to the $2,300 level on August 21. LME zinc forwards are near the recent low.

DBB is an ETF that holds the most liquidly traded LME metals

The fund summary for the Invesco DB Base Metals Fund ETF (DBB) states:

DBB owns long positions in aluminum, zinc, and copper. The most recent top holdings include:

As of August 17, DBB had the most exposure to zinc at 28.77% of assets. DBB was 20.33% invested in aluminum and 5.57% exposed to copper prices. At $18.04 per share on August 22, DBB had $162.37 million in assets under management. DBB trades an average of 94,570 shares daily and charges a 0.75% management fee.

Since the July 31/August 1, copper fell 6.6%, aluminum was 6.3% lower, and zinc forwards declined 9.9%.

The chart shows the bearish trend in DBB in 2023. Since July 31, the ETF fell 6.2% from $19.24 to $18.04 per share.

The five reasons to consider adding DBB to your portfolio and accumulating the ETF on a scale-down basis

DBB does an excellent job tracking a portfolio of zinc, aluminum, and copper prices. Over the past weeks, the declines in the metals and DBB have created an opportunity to load up on the leading and most liquid LME metals that offer value at the current price levels. The following five compelling factors support higher zinc, aluminum, and copper prices over the coming months and years:

• China - China is the world's leading base metals consumer. Weakness in China's economy has caused prices to decline in 2023. A recovery would lift Chinese demand for the metals that are infrastructure building blocks.
• Climate change- As the U.S. and Europe address climate change by supporting alternative and renewable energy sources and inhibiting fossil fuel production and consumption, metals demand will increase. Inventories and production could struggle to keep pace with the rising metals demand over the coming years.
• War in Ukraine - The ongoing war in Ukraine, sanctions on Russia, Russian retaliation, and the bifurcation of the world's nuclear powers create supply chain issues impacting the flow of commodities, and metals are no exception. Rising geopolitical tensions can influence metal's supply and demand fundamentals.
• U.S. interest rates - Rising U.S. interest rates to address the highest inflation in decades since March 2022 have increased the cost of carrying metal inventories. Higher financing costs tend to weigh on metals prices as consumers purchase requirements hand-to-mouth. Meanwhile, inflation has been trending lower, with U.S. short-term rates rising from zero to 5.375% over the past seventeen months. The trajectory of interest rate hikes will slow or even pause, taking selling pressure off metals prices.
• The U.S. dollar - The U.S. dollar has been the world's reserve currency for decades. While the LME is in the United Kingdom, the metals contracts use the U.S. dollar as a pricing mechanism. Over the past months, BRICS countries, including Brazil, Russia, India, China, South Africa, and their allies, have been working to introduce a BRICS currency to challenge the U.S. dollar. The dollar's dominant role will decline if support for a BRICS foreign exchange instrument for cross-border payments increases. A weakening dollar could cause metals prices to rise in U.S. dollar terms.

The case for higher base metal prices over the coming years is compelling. I favor a scale-down buying approach to the DBB ETF. It is virtually impossible to pick bottoms in any market as prices tend to fall to illogical, unreasonable, and irrational levels during selloffs. However, the cure for low prices is always those low prices as production declines, demand increases, and prices find bottoms during bear markets. I am a buyer of the DBB ETF, leaving plenty of room to add on further declines. Zinc, aluminum, and copper are critical infrastructure and green metals for the future. I expect the prices will reach significant bottoms sooner rather than later, and the DBB ETF will move higher with the metal's prices.

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