Industrial metal ETPs see inflows at investors shrug off trade-war threats

Mar 13th, 2018 | By | Category: Commodities

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ETF Securities has announced that its industrial metal ETPs saw net inflows of $9 million during the week ended 9 March 2018. According to the London-based ETP provider, the flows indicate cyclical optimism among investors despite threats of a trade-war dominating news headlines.

Industrial metal ETPs see inflows at investors shrug off trade-war threats

ETF Securities’ range of industrial metal ETPs saw $9 million in net inflows during the week ended 9 March 2018.

Although base metal prices fell last week after the Trump Administration unveiled tariffs to imports of steel and aluminium in the US, many ETP investors shrugged off the event.

ETF Securities makes the case that the tariffs may actually be a price positive for certain cyclical commodities.

“The tariffs could tighten the supply of metal coming from China,” explains Nitesh Shah, director of commodities research, ETF Securities.

“As a serial overproducer, cutbacks from China would be welcome news and could even increase prices; China is already trying to reduce capacity in steel and aluminium and this should push the country further along in its efforts.”

Investors may achieve broad industrial metals exposure through the ETFS Industrial Metals (AIGI LN). Aluminium is the second largest exposure at 24.9% after copper at 39.5%. Te ETP also provides exposure to zinc and nickel, at 18.2% and 17.3% respectively. The management expense ratio (MER) of AIGI is 0.49% and its asset under management (AUM) is $280 million.

Investors looking for more targeted exposure to aluminium may wish to consider the ETFS Aluminium (ALUM LN) which has $130m in AUM and a MER of 0.49%.

Adopting a more cautious tone, Shah noted, “The impact on the broader commodity complex will largely depend on the reaction from other countries. If a tit-for-tat trade war breaks out, we could see international trade decline and it could be the beginning of a downturn in economic prosperity for many countries, which could hurt cyclically exposed assets. The softening of rhetoric from the US by the end of the week could mean that other countries refrain from strong reciprocal measures, which could lower the risk of a severe escalation of a trade war.”

ETF Securities also reports that its gold ETPs attracted $14.5m during the week, marking the first substantial inflow in six weeks. While such flows are tiny compared to the size of the giant $6.2bn ETFS Physical Gold (PHAU LN), they indicate that although investors continued to build positions in cyclical assets, they also placed hedges against the threat of a trade war breaking out by increasing allocations to gold.

Shah notes, “Rising Treasury yields and a pause in US dollar weakness has made gold less attractive of late. However, gold’s role as a hedge to adverse events makes it attractive to investors who are worried about geopolitical events turning ugly.”

Looking elsewhere in ETF Securities’ report of weekly flows, the firm’s short USD ETPs saw $15.9m in net inflows, which Shah believes indicates that investors are betting against the temporary reprieve in US dollar weakness. Most of the flows went into the ETFS Long JPY Short USD (JPYP LN), but long sterling and long euro were also beneficiaries.

Lastly, ETF Securities notes that a rally in cocoa prices spurred investors into profit taking. Between August 2016 and May 2017, the firm’s cocoa ETPs, such as the $54m ETFS Cocoa (COCO LN), saw inflows close to $84m with bargain-hunting investors piling in as cocoa prices dropped 45% over that period. With cocoa prices up 35% since December 2017, many investors have begun taking profits. Outflows from these ETPs hit $18.9m last week as prices rose 6.6% over this period.

Shah notes, “Prices are rising after the International Cocoa Organisation said that it expects the surplus in production this year to be lower than last year and indeed revised downward the scale of stock overhang from last year. The presence of Cocoa Swollen Shoot Virus in Cote d’Ivoire (the largest cocoa producer) could limit the regions’ producing capacity in future years as maintenance programmes need to be undertaken to reduce the spread of the virus. The price of cocoa is already reacting.”

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