DBB - DBB In The Buy Zone

2023-09-13 12:15:19 ET

Summary

• Invesco DB Base Metals Fund ETF is a compelling commodity ETF below $20, owning aluminum, copper, and zinc.
• Base metals prices have declined significantly, with copper, aluminum, and zinc under pressure.
• Rising interest rates and a stronger U.S. dollar have pushed prices lower, but the trajectory of rate increases is expected to slow.

I wrote about the Invesco DB Base Metals Fund ETF ( DBB ) on Seeking Alpha on August 22, when the price was at the $18.04 per share level. On September 13, the exchange-traded fund, or ETF, was marginally higher at $18.65 per share. DBB is one of my favorite commodity ETFs for the coming months, offering compelling value below $20. If commodities rebound, DBB could lead the asset class as it owns three of the most liquid metals traded on the London Metals Exchange: aluminum, copper, and zinc.

Metals prices have declined - Copper, aluminum, and zinc are under pressure

After reaching highs in 2022, base metals prices have dropped.

COMEX copper futures declined 24.2% from the March 2022 $5.01 high to above the $3.80 level on September 13.

Three-month London Metals Exchange copper forwards declined 22.6%, falling from $10,845 in March 2022 to $8,391 per metric ton on September 12.

Three-month high-grade LME aluminum forwards fell 46% from $4,073.50 in March 2022 to $2,196.50 per ton on September 13.

LME zinc prices declined 46.3% from $4,563.05 in March 2022 to $2,449.95 per ton in mid-September 2023. While copper and aluminum rose to new record peaks in 2022, zinc stopped short of the November 2006 $4,658 all-time high.

Rising interest rates and a stronger U.S. dollar push prices lower - The trajectory of rate increases will slow

While the most liquid exchange platform for nonferrous metals is in London, the contracts trade in U.S. dollar terms as the dollar is the world’s reserve currency. Since March 2022, when the metals reached highs, U.S. short-term interest rates have risen from zero percent to 5.375%, and the U.S. Federal Reserve’s quantitative tightening program has lifted interest rates further along the yield curve. Higher rates have weighed on copper, aluminum, and zinc prices as they increase the cost of carrying inventories.

Meanwhile, the U.S. dollar’s value against other world reserve currencies is a function of interest rate differentials.

The dollar index rose to a two-decade 114.780 high in September 2022 and was near the 105 level on September 13. A strong dollar tends to weigh on commodity prices, and base metals are no exception.

The Fed aggressively pushed interest rates higher to battle the highest inflation since the early 1980s. After rising from zero to over 5%, the trajectory of rate hikes will likely slow over the coming months as inflation has declined, albeit not to the central bank’s 2% target level.

Supply and demand fundamentals support higher lows - Green energy initiatives are bullish for metals

The demand for metals has increased as the U.S. and Europe address climate change by supporting alternative and renewable fuel sources and inhibiting hydrocarbon production and consumption. Goldman Sachs has called copper “ the new oil .” Electric vehicles, wind turbines, and other green energy initiatives require copper and other metals. Copper is the bellwether base metal, with aluminum, zinc, lead, nickel, and tin prices typically following copper prices higher or lower.

One of the other factors that has weighed on metals prices since the March 2022 highs has been economic weakness in China. China is the world’s second-leading economy and most significant base metal consumer. When China emerges from its economic malaise, the demand for metals could experience explosive growth.

DBB owns aluminum, zinc, and copper - The ETF has declined with the metals

The fund profile for the Invesco DB Base Metals Fund ETF states:

As of September 10, DBB’s top holdings include:

As the chart illustrates, DBB invests in aluminum, zinc, and copper. At $18.65 per share on September 13, DBB had over $167.8 million in assets under management. DBB trades an average of 92,817 shares daily and charges a 0.75% management fee.

The chart shows the 31% decline from the $27.01 March 2022 high to $18.65 on September 13, reflecting the lower copper, aluminum, and zinc prices.

Leave room to add on further declines, but DBB already offers compelling value

The following factors favor an eventual recovery in nonferrous metals prices and the DBB ETF product:

• The trajectory of U.S. interest hikes will slow over the coming months.
• Stable interest rates could cause a steady to lower U.S. dollar.
• The bifurcation of the world’s nuclear powers and the potential for a BRICS currency to challenge the U.S. currency could cause the dollar’s dominance in cross-border trade to decline.
• China could eventually emerge from its economic weakness, causing metals demand to increase dramatically.
• Green energy supports higher metal demand.
• Production may struggle to keep pace with the rising demand, as it takes years to bring new mines into full production.
• Metals prices remain in long-term bull markets, despite the correction from the March 2022 highs.

It is virtually impossible to pick bottoms in any market, as bearish trends can take prices to illogical, unreasonable, and even irrational levels. However, supply and demand fundamentals eventually cause prices to correct. Therefore, buying DBB at current levels, leaving plenty of room to add on further declines, could be the optimal investing approach for the coming years.

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