Should investors be worried about the fall in base metal indices?

Key Takeaways:

1. Dow Jones U.S. Industrial Metals & Mining Index has slipped ~4.75% in the last five trading sessions.

2 .Global political tension, US inflation, supply chain, and government policy issues are a few reasons influencing the stock of base metal companies.

3 .Three-month copper on London Metal Exchange dropped ~1%. The most-traded October copper contract on the Shanghai Futures Exchange lost 1.6%.

Industrial metals are the foundation of the future of any economy. These metals have been used in different formats to cast various objects for ages. With time, the importance of these metals has grown. Some key metals include copper, aluminum, iron, steel (an alloy of carbon and iron), lead, and tin, which have a wide range of applications in our daily lives as well as for the growth of the economy.

However, the base metal sector has lately gained attention after the sector delivered negative growth in the last five trading sessions. In the previous five trading sessions, Dow Jones U.S. Industrial Metals & Mining Index has slipped ~4.75%. Dow Jones U.S. Industrial Metals & Mining Index provides investors Dow Jones U.S. Industrial Metals & Mining Index.

In the last five days, a similar drop was seen in S&P/ASX 300 metal & mining index. The index slipped 2.09%. Many players from this sector have witnessed a decline in their share prices. Thus, have raised eye brows of investors interested in this space.

In this article, we will try to understand the factor influencing the base metal sector.

Recent update on base metal prices

On 31 August 2022, base metal prices slipped as recent data from the world's major economies signaled tepid economic performance globally, reducing the demand outlook for the industrial metal.

Prices of most base metals in Shanghai dropped on Wednesday as supply concerns eased after the power supply resumed in Sichuan province. However, the weak manufacturing performance in China's economy weighed on sentiment.

Three-month copper on London Metal Exchange dropped ~1%, extending losses from the previous session. 

The most-traded October copper contract on the Shanghai Futures Exchange lost 1.6% to 60,950 yuan per tonne. Factory activity in China shrank amid rising COVID-19 cases and a deep crisis in the property sector. Copper is considered an indicator of economic health, and losses in this segment are impacting investor sentiment.

Related Read: Will the Australian stock market be influenced by the slowdown in the Chinese economy?

Other than this, many traders evaluated signals of slower growth after Federal Chair Jerome Powell indicated that US Central Bank would increase the interest rates to control the rising inflation.

Also Read: Is September an alarming bell or an opportunity for investors?

Some Interesting facts:

• From space shuttle to a needle, base metals have a wide range of applications. The most popular base metals include copper, which is used in wiring due to its conductivity. The next metal is aluminum, which is used in production from drink cans, foils to aerospace engineering. Aluminum is a lightweight and corrosion-free metal. Steel is another metal that is an alloy of iron and coke and is used in applications from cutlery to automobile construction.
• In terms of consumption and production, most industrial metals are dominated by China, the US, and European Union. The three economies provide a stable and long-term demand base for this sub-asset class.
• In the recent Fed meeting, Powell warned that Americans were headed for a painful period and probable rising joblessness. As a result of slow growth, there is a possibility of a weakening the demand for base metals.
• Copper is considered a reliable indicator of economic health because of its widescale application from home to factories, electronics to power generation and transmission, and many more. As per the FitchRatings, Copper production has dropped from its peak in March 2022 due to social conflicts, despite new mines. The agency pointed out that political paralysis has eroded the investment climate. The ongoing political noise has impacted Peru's economic growth outlook.
• Peru ranks second in the list of top 10 copper-producing countries. It ranks next to Chile.
• China is third on the list of the top 10 copper producing countries. This country is currently experiencing a slowdown in the economy.   

An Opinion: Ongoing development Vs Possible outlook

Undoubtedly, social conflicts and political tension have impacted the production of copper and many other base metals. Peru expects copper prices to fall to US$3.40 per ounce in 2023 from US$3.90 in 2022. The projection was made by the economy ministry. However, the situation would not remain the same always.

Last week there was an update that the Peruvian government has presented its 2023 budget plan to Congress and proposed a 9% increase from this year's initial budget to US$55.93 billion. The government expects a 3.5% growth in 2023. Mining is the primary source of financing, and the government is budgeting for the drop in copper prices. The industry in Peru is currently experiencing protests from local people, resulting in a production slowdown. For information, other than copper, Peru is among the four producers of silver, lead, zinc, tin, and molybdenum. We may expect some improvement post the 2023 budget with the proposed budget.

Chile's government also introduced tax reforms in 2022, like the ad valorem tax. Miners have indicated that these taxes would make Chile's copper industry less competitive and probably lower production from its mine.

Chile and Peru are the top producers of base metals like copper. Based on the above developments, we can assume that internal problems and government policies are a few factors impacting copper production in these countries. Because of these challenges, companies in this space might experience a drop in their share prices.

At the same time, we can also assume that other countries in the list of top ten copper producers will have the opportunity to fulfill the rising demand for this metal.

After Chile and Peru, the list of countries on the list of top copper producers includes China, the Democratic Republic of the Congo, Australia, the USA, Zambia, Russia, Indonesia, and Mexico.

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