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Industrial metal dynamics and risks that cast a shadow on ınvestment

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Industrial metals… Industrial metal prices, which are an important basis for the global economy, saw a major rally after the reopening of economies. The combination of increased demand and slower supply changes is pushing prices to climb. The increase in pricing reveals the inflation pass-through effect of higher costs. Slowness on the supply side and long delivery times cause a shortage of goods in the market.

 

  

Gold-copper ratio… Source: Bloomberg

 

How to read the gold copper ratio? Because of the role of copper in construction and infrastructure projects, it can be associated with economic growth, so the ratio of gold to copper can be used as an indicator of market sentiment for economic growth. Therefore, the decline in the gold-copper ratio can be seen as a sign of rising future economic growth prospects. When we look at the 30-year gold/copper ratio graph on the Bloomberg terminal, it is observed that the economic recession in the market increased during periods of increase, while the economy performed well during periods of growth. Gold performed more strongly if the economy’s growth trend was positive, copper was performing well, or was tending to slow down. The rate reached the highest level of the last 30 years during the 2008 global crisis.

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The economic balance effect of metal prices… A prolonged metal boom can yield significant economic gains, especially for large exporters. It can be an extra addition to the economic growth rate experienced by metal-exporting countries compared to importing countries. Of course, we may have the chance to observe similar positive effects in terms of current account and budget balances. It is almost impossible to increase mine production quickly, it is difficult to find large new mines no matter how much demand increases.

 

Copper is an industrial metal that is still widely used today. Copper can also be combined with other metals to make alloys such as brass and bronze that are even harder and stronger than pure copper. Therefore, its usage area is very wide and it has a very serious place in industrial production. The largest copper producers in the modern world are Chile (28.4% of world supply), Peru (12.1%), China (8.2%), Congo (6.3%) and the USA (6.2%) ). Left-wing leader Boric won the elections in Chile. The new head of state may pursue harsh policies, including a pledge to combat climate change, by blocking a proposed mining project in the world’s largest copper-producing country. Chile was the first country in Latin America to break from US domination during the Cold War and to maintain socialism with the election of Salvador Allende in 1970. A few years later, the course was reversed when Pinochet’s coup ushered in an era of right-wing military rule. Boric wants to adopt a more European-style social democracy without deviating from the Cuban and Venezuelan style of authoritarian socialism. In addition, the picture that emerged after the elections also points to a divided congress structure.

 

Copper prices and the Chilean peso… Source: Bloomberg

 

Conclusion? Supply chains play an important role. Much of the technology and infrastructure depends on industrial metals. The need for these metals is expected to continue to rise as more and more countries take their commitments to reducing carbon emissions and cleaner energy seriously. Copper, aluminum, zinc and nickel all play an important role in the upcoming energy transition. Potential risks include excessively high oil prices and political struggle over necessary related infrastructure projects in the US (power generation and the implementation of electric charging networks).

 

Due to price and investment risks, political struggles, ideological changes and fears that the spread of the Omicron coronavirus variety will hinder the global economic recovery, along with the grouping on the axis of production and demand, may also take place. Further quarantines could hurt metal demand.

 

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