In commodity futures markets, gold, oil and corn typically grab the headlines, especially whenever there’s a surge in demand, concerns over supply or worries about political developments.
Meanwhile base metal commodities — such as copper, aluminum, zinc, tin and lead —are perceived by some investors as the dowdy cousins in the sector. But in reality, the metals, led by copper, are the workhorses of the global economy. They are often in tremendous demand, which also presents opportunities for the serious investor.
Nonferrous metals are found in relative abundance throughout in the world and are dug up and refined by a string of mining companies. But a strike or other supply issues at a major producer can sometimes spark panic in the markets.
The ebb and flow of metal demand provides a great window into the health of the global economy. In the early to mid-2000s, for example, the price of copper surged as China’s economy boomed because the country needed to import more of the metal to feed its roaring industry. Copper, along with most other commodities, plunged during the 2008 recession as demand collapsed, however.
Despite being traded for centuries, copper, lead and tin are still the main building blocks for industry. Other metals, such as aluminum, zinc and nickel, are the relative newcomers but are crucial in a range of modern manufacturing processes.
Metal commodities are traded around the world, paced by the London Metal Exchange, or LME. They are also traded on the New York Mercantile Exchange, which is part of the CME Group, and the Central Japan Commodity Exchange.
Copper, known as the red metal, is said to be the first metal ever traded. Chile is the world’s biggest producer, and China is its biggest consumer. It may not be hoarded or prized like gold, but it is sought after because of the wide variety of applications for copper. The metal is a good conductor of electricity and does not corrode, making it ubiquitous in wiring, plumbing, generators, motors and cooling.
On the CME, copper’s contract size is 25,000 pounds and is traded in U.S. dollars per pound. On the LME, prices are in quoted dollars, per metric ton.
Aluminum is one of the most highly traded based metal commodities, and China is both a leading producer and consumer of the metal. The U.S. and Russia are also major producers of the aluminum.
A CME aluminum contract consists of 55,000 pounds and is quoted in dollars, by the pound. Aluminum, the third most abundant element on earth, is used in automobiles, planes, and in the housing sector.
Nickel is a volatile commodity on global markets but is more thinly traded than the other base metals. Once again China is the dominant consumer for the metal, which is produced in several countries, including Canada, China, Australia and Russia.
Nickel is used for making stainless steel and other corrosion-resistant alloys.
Like any market, investors need to do their research and talk to professionals before trading in metals futures. It’s essential to know what is driving prices up or down, and each the metals can be moved by factors unique to its market.
The sprawling global metals futures sector is not for everyone due to the significant risks and rewards involved. Investors should always consider their full financial picture and seek professional advice before entering such markets. Contact us for a free consultation and expert advice about investing in metal commodities and other futures markets.