Commodity Report: Industrial Metals

by / / Articles, Trade Ideas
The acceleration of the global economic recovery over the last two years has been a major boost for the industrial metals complex, with prices up strongly, allaying fears of a global slowdown.
This has led to mining houses clawing it’s way back to profitability, by generating higher levels of cash and paying down debt.
Another driving factor has been the stabilization and improvement of economic data out of China, which previously caused unease amid fears of a “hard landing“.
Yesterday banking and investment house JP Morgan released a report outlining their views on the impact of inflation of commodities, stating among other factors, the following: “Rising inflation is beneficial for commodities.
In fact, metals, both base and precious, exhibit their best performance (both outright and volatility-adjusted) when inflation has reached the Fed’s 2 percent target and continues rising.”
Plotting the Bloomberg Commodity Index versus the US 10 Year Yield, we can see that over the long term commodities tend to follow yields (which could be used a proxy for inflation expectations) albeit with a lagging effect.
Signs of inflation starting to increase in the United States has lead to interest rates rising and over the medium and long term this bodes well for commodities.

From the lows of 2016, prices have appreciated as follows: 
Copper +59%
Zinc +142%
Aluminum +51.83%
Nickel +81.52%
With the global economy on a strong footing, what does this mean for industrial commodities?

I take a brief look at the technical setups for each of the 4 metals mentioned above.


Following a break of the long term downward trend in November 2016, we saw the price consolidate in a sideways to downward trend for the next 6 months, in a re-test of the breakout level. During early to mid June 2017, the price then resumed it’s upward trend, breaking through prior resistance level of 6353. At current levels, the price trades just below the prior swing high seen from April 2013 to January 2014. While the trend is higher, the technical indicator – Relative Strength Index – points to a potential pullback in the short term. While the price has moved higher, the RSI has not confirmed these highs and a break of the incline/upward trend could signal a change in short term trend – (pullback before the next leg higher).


Currently, the price is forming a rising wedge pattern which may be signaling the potential for a downside break over the short term term. This rising wedge comes after we saw a breakout from an 8-year upside consolidation break, allowing the price to appreciate from 2350 to the last close of 3548. The potential for a short term downside move is enhanced by the RSI which is moving lower higher while the price is rising.    An image
Aluminum  The price continues to trade in a strong upward trending channel after having bottomed in late 2015. Key resistance levels at 2113 and 2192 have also been broken and the price remains above a rising 40-week moving average. While the trend is currently higher, the price is nearing the swing high from March 2012 while the Relative Strength Index (RSI) is starting to show signs of a loss of upside momentum. An observation of the candle structure year-to-date reflects sellers starting to gain the upper hand although we may be in the early stages of a short term turnaround.


The weekly chart shows the price currently testing it’s downward trend line resistance from the swing highs in February 2011 and May to September 2014. This level also coincides with the prior support levels which was broken on the downside at 13219 and now serving as a current area of resistance. Here we could see a pullback before we break the long term downward trend.

A recent report from US-based Doubleline Capital also shows commodities have reached a bottom relative to the somewhat richly valued equities market.

Bottom Line: While prices are on a steady upward trajectory, we are encountering areas of resistance that may see prices pause or pull back before the next leg higher. Additionally, with inflation on the rise over the medium and long term, we may see these commodities follow suit.

Have a chat with the Unum Trading Desk to find out which commodity shares and ETFs (local and offshore) you should be adding to your portfolio.


Lester Davids

Lester Davids

Trading Desk Analyst at Unum Capital
Lester started his career as an intern in the Group Schemes Risk Management department of Old Mutual in 2006 after having attained his National Diploma in Internal Auditing from the Cape Peninsula University of Technology. After a year and four months of service he took up the opportunity offered by Deloitte's Risk Advisory Services for a three-year contract as a Trainee Internal Auditor.

Whilst searching for employment after his had contract expired, he made the decision to document his ideas for his personal passion which was financial markets with a view to build a public profile and record of all work.

His passion for investment and market-related content dates back to his love for reading having started to notice the financial market data alongside the sports pages as a university student in 2004.

Lester is Trading Desk Analyst and has been with Unum Capital since July 2016.
Lester Davids