The laws of supply and demand are unbreakable: cut supply, maintain demand, and prices will firm. So when you consider that the world’s top five metals mining firms have cut capital spending by 80 percent from their 2011 peak of $40 billion (according to Euromoney’s CEIC), it should come as no surprise that prices for copper, zinc and aluminum are near multi-year highs.
And it’s not just the major multinational firms that are showing newfound restraint. “Steel and aluminum capacity has been sharply reduced in China, thanks to environmental concerns,” says Charl Malan, senior analyst for natural resources at VanEck.
The demand side of the equation is also playing a role. The International Monetary Fund (IMF) predicts the global economy will grow around 3.5 percent in 2017 and again in 2018. That would be the best showing since 2010. Historically speaking, firming economic growth leads to rising demand for a range of commodities as construction and manufacturing shift into higher gear.
Of course, the supply and demand backdrop for each type of commodity is unique. Roughly a year ago there was a strong rebound in coal prices, and subsequent to that the VanEck Vectors Coal ETF (KOL) has risen nearly 40 percent higher, as Chinese coal imports remain elevated.
Lower output and firming demand are conspiring to whittle down once-bloated inventories for some kinds of commodities. The amount of zinc stored in warehouses, for example, has fallen from 450,000 tons a year ago to a recent 242,000, according to Kitco.
That said, the outlook for energy commodities isn’t as clear cut. U.S. shale producers can now boost or trim production in response to oil prices, which explains why a barrel of oil may trade in the $40-50 range for the foreseeable future.
That mixed outlook for various commodities highlights the challenges for investors. The PowerShares DB Commodity Index Tracking Fund (DBC), for example, is the largest in its category, with $1.9 billion in assets. But the fund, which carries a hefty 0.89 percent expense ratio, is down nearly 5 percent in 2017, thanks a roughly 50 percent weighting in energy.
Paging Doctor Copper
Analysts single out copper as having an especially good supply-and-demand set up these days. “The markets have come back to balance very quickly. You're seeing more predictions of shortages in the next few years,” says Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, which is especially bullish on copper.
Indeed, copper output exceeded demand by a combined 815,000 thousand tons in 2015 and 2016, according to BMI Research. But current forecasts suggest a 154,000 ton production deficit in 2017, and demand is likely to outstrip supply through 2021.