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Positive economic news, particularly from China, helped to fuel a mini-revival in industrial commodity prices last week despite rising expectations that the US Federal Reserve will begin tapering its stimulus programme.
Exchange-traded products (ETPs) linked to industrial metals were a significant beneficiary of this revival, with aluminium-based products seeing additional demand due to a combination of actual and anticipated production cuts.
ETFS Aluminium (ALUM), a physically backed aluminium ETP issued by London-based commodity specialist ETF Securities, enjoyed record inflows of $54m over the week.
Among the production cuts was the decision by Rio Tinto, the world’s largest aluminium producer, to phase out production at its Shawinigan smelter. The UK-headquartered company said in a statement last week that it would immediately reduce production at the Quebec, Canada, plant by 50,000 tonnes and take the remaining 50,000 tonnes of capacity offline by the end of November.
Other aluminium producers, especially in China, are also expected to cut production as continued oversupply is harming prices.
Elsewhere within the industrial metals space rising demand conditions, manifested in part in better-than-expected Chinese industrial production numbers, were the key driver of asset flows. Of note, in terms of ETP inflows, was the $5.8m funnelled into ETF Securities’ ETFS Zinc (ZINC) product over the week and the record $145m ploughed into ETFS Physical Silver (PHAG), the provider’s physical silver ETP.
While silver is usually clumped together with gold as a precious metal, it’s worth remembering that over 50% of silver demand comes from the industrial sector versus just 10% for gold.
ETF Securities believes that sustained robust growth for the Chinese economy remains in place and that this should continue to favour more industrially-linked metals.
Martin Arnold, a senior analyst at the firm, said: “Industrial metals are heavily dependent on the outlook for Chinese growth. China accounts for around 40% global demand across the industrial metal complex, but concerns over a China slowdown are exaggerated in our opinion. The industrialisation process of China is still at only an early stage, and as such, when a massive population is combined with increasing incomes, demand for raw materials, and industrial metals in particular, is likely to continue to continue at a robust rate. On the supply side, concerns over labour stoppages and declining ore grades are prevalent and raise the cost of metal mining production.”
He added: “However, different industrial metals will be affected in different ways. We expect copper to be one of the stronger performers, as it has a wide range of industrial applications from construction to the auto sector. Similarly, lead, which is mainly used for battery production is expected to benefit from its exposure to strengthening vehicle and e-bike sales in China. Nickel, however, could underperform other metals, as it suffering from a surge in inventories as its demand in stainless steel production is waning. While stainless steel production accounts for the vast majority of demand for nickel, Chinese producers have increasingly been using substitutes, which exacerbates demand problems.”
Investors looking to capitalise on these trends have a range of ETPs at their disposal. In addition to ETF Securities, which is the market leader in the commodities ETP arena, Source, Deutsche Asset & Wealth Management, UBS and short and leverage specialist Boost all offer compelling products linked to industrial metals.