Base metals, known for their abundant availability and affordability, play a significant role in various industries. Unlike precious metals such as gold and silver, base metals are easier to mine and are traded extensively on exchanges like the London Metal Exchange (LME) and the Multi Commodity Exchange (MCX). Some of the most commonly traded base metals include copper, zinc, aluminium, and lead. These metals are crucial in sectors like manufacturing, infrastructure development, building construction, and equipment production.
Factors Influencing Base Metal Prices
The pricing of base metals is influenced by various factors that reflect both global economic conditions and industry-specific dynamics. One critical element is the economic situation in China, which, as the largest consumer and producer of base metals, plays a foundational role in global pricing. The balance between supply and consumer demand is another essential factor that directly impacts metal prices. Increased industrial and manufacturing activities typically lead to a heightened demand for base metals, driving prices upward. Moreover, geopolitical stability in major producing countries affects production levels and can introduce additional volatility in the market. Data on inventory levels at the London Metal Exchange (LME) is also important, as it helps traders assess the market’s supply and demand balance. Additionally, fluctuations in the Dollar Index can affect the attractiveness of base metals since they are priced in U.S. dollars. Monetary policies from major central banks influence economic conditions, thereby impacting both the demand for and prices of these metals. Furthermore, economic data print from the USA and China are crucial, as key data releases from these two economies can significantly influence market sentiment and prices. Finally, mine closures and restarts lead to changes in production capacity, which can cause immediate shifts in supply.
Current Market Dynamics for Base Metals
Presently, the Dollar Index stands at a multi-week high of around $107, which has diminished the appeal for industrial metals, given that these commodities are dollar-denominated. A sluggish Chinese economy, coupled with the absence of substantial stimulus measures, is constraining base metal prices. Additionally, the possibility of tariffs on China after Donald Trump winning the presidential election have changed the market sentiment towards copper and other metals. Ongoing geopolitical tensions, notably between Russia and Ukraine and in the Middle East, are also likely to keep prices volatile.
Trading Base Metals with LME Inventories and Economic Indicators
To successfully trade base metals one must consider various economic indicators that impact prices. Key economic data such as the ISM Manufacturing Purchasing Managers’ Index (PMI), Durable Goods Orders, GDP data, Construction Spending, Caixin Manufacturing PMI, and Industrial Production are crucial in formulating trading strategies. In this context, we are discussing ISM Manufacturing PMI data for a better understanding of the movement of copper.
ISM Manufacturing PMI is a key indicator for base metals and is released once a month during the first week. Traders pay close attention to this data because it serves as a leading indicator of economic health. Businesses often react quickly to market conditions, and purchasing managers provide the most current and relevant insight into their company’s economic outlook.
Latest Data (November 1, 2024):
– Actual: 46.5
– Forecast: 47.6
– Previous: 47.2
Since the actual data fell short of the forecast, the impact on base metals was negative, leading to a correction of over 6% in MCX Copper from its November high. It is important to note that price action and global sentiment must also be supportive of such a significant move.
LME Inventories Data: In India, LME Inventories data is updated at 2:30 PM during Standard Time and at 1:30 PM during Daylight Saving Time. The LME numbers are updated for all base metals; we will use copper as an example. LME data indicates the amount of stock available in the warehouse. A significant drop in inventories signals lower supply and may drive prices higher, and vice versa. For example, if inventories have been declining by 10000-15000 tons per day and then decreased by 40000 tons today, traders will likely react quickly to this news, indicating a potential supply deficit in the market that may push prices higher.
Base metals offer a great opportunity for traders. They are often underrated in commodities trading. As mentioned earlier, base metals are more commonly available and easier to mine than precious metals. This results in less volatility within the base metals market, making it easier for traders to identify support and resistance levels, as prices usually trade within a narrow range. With the right technical tools and by staying updated on the latest economic news, trading base metals can be more straightforward than trading precious metals or oil.
Now that we have a basic understanding of base metals, let’s delve into the technical aspects.
As previously discussed, various factors and economic data can impact base metal prices. Additionally, there are several technical indicators that can assist in trading these prices. One of the most suitable indicators, based on price action, is the Bollinger Band.
Bollinger Bands consist of three lines: the middle line represents the moving average, while the two outer bands indicate price volatility. When prices cross or touch the bands, it signals overbought or oversold conditions, helping traders identify potential reversals or trends. Bollinger Bands are particularly effective for base metals because these markets often trade within predictable ranges influenced by supply and demand factors. The bands help identify overbought or oversold conditions, allowing traders to spot potential reversals or breakouts within volatile yet range-bound price movements.
The Strategy
If prices move above the upper Bollinger Band, it indicates an overbought zone. Wait for the next candle to move back inside the band, then take a short position and place a stop-loss order above the previous candle’s high. This strategy is most effective on a 4-hour chart. It is advisable to backtest it across all base metal commodities to assess its effectiveness and utility in trading.
(The author Deveya Gaglani is Research Analyst- Commodities at Axis Securities. Views are own)