When the world economy is growing and demand for physical goods is climbing, industrial metals tend to thrive. The demand for these materials has grown significantly over the past decade. However, investing in industrial metals can be risky. These commodities are sensitive to changes in supply and demand, as well as volatile pricing. These commodities copper, aluminum, zinc, nickel, iron ore, and gold are derived from raw minerals that have specific properties useful for manufacturers making factory equipment or other products with a high metal content (e.g., cars or refrigerators). Investing in industrial metals directly has its risks but may be a good diversification tool for an investor’s portfolio.
Commodities: What Constitutes an Industrial Metal?
Industrial metals are types of commodities that are derived from raw minerals. They are typically used in manufacturing. The most important industrial metals are aluminum, copper, zinc, lead, nickel, tin, iron ore, and gold. Industrial metals are often priced in US dollars. Commodities include both industrial metals and agricultural goods, such as oil, coffee, corn, and wheat. When you buy coffee or wheat, you are buying a product, not a stock. Commodities are raw materials that are used to make other products. They include oil, natural gas, gold, silver, coffee, and wheat.
COPPER is the most important industrial metal from an investment standpoint. About 40% of the world's copper is used for electrical wiring and cabling. By weight, copper is the best conductor of electricity and heat. It is also used in plumbing (9%), construction (9%), transportation (8%), and other industries. Mandatory recycled content for copper has increased demand for scrap copper. This is a positive for the long-term outlook for copper supply. The demand for copper is expected to grow over the next decade as economies recover from the 2008 Financial Crisis and technological innovations are adopted. A potential downside is that copper is highly susceptible to the effects of adverse weather. This was demonstrated by the 2010 Pakistan floods, which resulted in a 60% drop in copper prices due to a decline in supply.
ALUMINIUM is a lightweight, corrosion-resistant metal that is used in a wide variety of industrial applications such as beverage cans, car parts, and building materials. The world's largest producers of aluminum are China, Russia, Brazil, and Canada, but the U.S. is the largest consumer. In 2018, the U.S. was importing about 90% of the aluminum needed for its manufacturing sector. There is a risk that a trade war could disrupt the supply of aluminum from China. The U.S. has imposed tariffs on Chinese imports, and China has responded with tariffs of its own. The U.S. government may also increase tariffs on imports from Canada, Brazil, and other countries that produce aluminum, due to national security concerns.
ZINC is used to produce goods such as paints, rubber, batteries, and plastics. It is a byproduct of many processes, including the extraction of iron ore. This means there is little risk of a shortage, as iron ore is abundant and it would be uneconomical to produce zinc only for its own sake. Zinc is used in many ways in the construction space. The U.S. government uses zinc to produce coins, and it is also used in paint, rubber, and batteries. Zinc is traded on the London Metal Exchange and the New York Mercantile Exchange.
Nickel is an important industrial metal used in stainless steel and other alloys, batteries, and in chemical processing. The majority of the world's nickel is produced from the sulfide ore found in the Sudbury Basin in Ontario, Canada. Nickel is a byproduct of copper and gold mining in the Sudbury Basin. Like other industrial commodities, nickel is susceptible to fluctuations in demand driven by changes in the global economy. In 2011, for example, strong Chinese demand for nickel led to a spike in prices.
IRON ORE is a major source of iron and is primarily used in the steel-making process. China is the largest producer and consumer of iron ore, and it accounts for half of the global supply. The U.S. is the world's largest importer of iron ore, and Brazil is the largest exporter. The demand for iron ore is expected to increase over the next decade as the world's population grows and economies recover from the financial crisis. The iron ore industry has been plagued by oversupply and price declines since 2011. This led to a period of weak profits for mining companies. Prices have recovered somewhat in recent years due to reduced supply and uncertainty surrounding trade with China.
GOLD is an important industrial metal used in electronics, jewelry, and in the production of dental fillings. The majority of gold is produced as a byproduct of copper and silver mining. Gold is a commodity, but is also an investment option. Gold is a haven investment that tends to rise during times of economic uncertainty. It doesn't correlate to the stock market and is less volatile than other commodities like oil. The price of gold is highly sensitive to rising interest rates. This is because gold does not pay interest and is seen by investors as an alternative to cash. Conversely, gold prices fall when rates fall.
Industrial metals are important commodities that are used in many industries, including construction, transportation, and manufacturing. Industrial metals are sensitive to changes in supply and demand, as well as volatile pricing. Investing in industrial metals directly has its risks but may be a good diversification tool for an investor’s portfolio.