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Iron ore leads gains for industrial metals, up nearly 65% this year

Industrial metals have proven their resilience in the face of a weakened global economy, with iron ore among the biggest market gainers, poised to end the year with an almost 65% price climb.

“Certainly early in the year, metals got COVID along with any other commodity, but the injection of massive liquidity healed them fast and made them stronger during the rest of the year,” said Hakan Kaya, senior portfolio manager on the Neuberger Berman Commodity Strategy Fund
NRBIX.
“Liquidity is an effective vaccine for demand shocked commodities.”

Metals also had a good run up along with the rebound in Chinese PMI and the “level of the Chinese economy seems to have recovered to the level before the start of the pandemic,” he told MarketWatch.

“Absent an economic overshoot and the seasonal slowness during [the first quarter], we may expect metals to take a quick breather in the near term,” Kaya said. However, “the western world with additional potential fiscal stimuli will likely pick up where China left, so we see demand continuing to be supported by government policy incentives.”

The January futures contract for 62% iron-ore fines delivered to China
TIOF21
traded on Comex settled at $150.70 per dry metric ton on Thursday, the highest most-active contract finish since February 2013, according to Dow Jones Market Data.  Prices have gained about 64.7% year to date. Prices had hit a low of $78.07 on March 23 this year, the lowest since November 2019.

“There is
only one buyer big enough to drive the incredible, near insane rally in iron
ore futures right now, and that is the Chinese economy,” said Ryan Giannotto,
director of research at exchange-traded fund issuer GraniteShares. “No one else
is spurring such a demand resurgence, and this activity has rippled throughout
the industrial metals space to encompass copper, aluminum and zinc as well.”


“There is only one buyer big enough to drive the incredible, near insane rally in iron ore futures right now, and that is the Chinese economy.”


— Ryan Giannotto, GraniteShares

Iron ore producer Vale SA
VALE
in Brazil has not been able to ramp up production following its dam failure in 2019, “constricting supply elasticity,” and contributing to the metal’s year-to-date rally, he said.

Among other industrial metals, March copper
HGH21
finished Thursday at $3.576 a pound on Comex, up nearly 28% for the year so far. Prices trade around their highest levels since early 2013.

On the
London Metal Exchange, cash prices for aluminum were at around $2,031 per
metric ton Thursday, up nearly 13% for the year, and zinc cash prices were at
$2,810 per metric ton, with a year-to-date rise close to 23%.

Overall,
industrial metals performance has been driven by “little in the way of excess
supply” before the pandemic, and the “swift recovery in manufacturing globally,
which normalized demand growth,” said Rob Haworth senior investment strategist
at U.S. Bank Wealth Management.

Also contributing to the rally in prices of industrial metals were the “limited COVID-19 infections in emerging in Asia and, especially China and Taiwan since April, which has led to quicker normalization in demand growth in the largest marginal consumer of metals,” Haworth told MarketWatch.

The S&P GSCI Industrial Metals Index
XX:SPGSIN,
a benchmark for investment in performance in the industrial metals market, is trading more than 21% higher this year. It’s a subindex of the S&P GSCI
XX:SPGSCI,
currently composed of 24 exchange-traded futures contracts on physical commodities, which has lost around 10% this year.

The recovery
in industrial metals prices from earlier this year when the pandemic took hold
is particularly impressive.

Industrial
metals prices had “plunged in the first phase but quickly rebounded, and most
have made new highs,” said Christopher Ecclestone, mining strategist at
Hallgarten & Company. Talk of the move being more than just a bounceback
began when precious metals soared in the summer and autumn was really when the
“base metals, battery metals, rare earths and specialty metals started forging
into territory not seen in years,” he said.

The S&P
GSCI Industrial Metals Index rose more than 11% in November alone, the biggest
monthly percentage gain for the index since December 2010.

“Industrial
metals enjoyed a strong rally in prices in November,” with both copper and iron
ore recently hitting multiyear highs, said Matthew Miller, vice president of
equity research at CFRA Research. News on COVID-19 vaccines, in particular, is
“giving optimism for an impressive economic recovery in 2021, he said.

CFRA is bullish in general on the outlook for industrial metals next year, “although the market might need to digest the incredible speed of the recent rally,” he warned.

“China’s infrastructure stimulus remains the driving force for industrial metals,” with copper, in particularly, potentially “a structurally tight market for several years, especially given the incremental demand from the world transitioning to electric vehicles and green energy,” said Miller.

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