Industrial Commodities Find Bottoms | Seeking Alpha

The prices of industrial commodities fell to multi-year lows in late 2015 and early 2016. The prices of ferrous and nonferrous metals and many other minerals and even energy and agricultural commodities began to move away from those bottoms towards the end of the first quarter of 2016. Prices gradually improved throughout the year, but it was in the aftermath of the U.S. election in November that prices took off to the upside. U.S. President Donald Trump promised to rebuild U.S. infrastructure on the campaign trail, and the prices of many raw materials climbed after his surprise victory. The rally continued into early 2017 and reached a peak in February and early March. However, a series of legislative failures and the realization that transforming campaign promises into legislative action is not as easy as it sounds caused a downside correction in many commodities. Even as the value of the dollar fell, many raw materials moved to the downside. However, it now appears that the correction has come to an end, and we have seen some dramatic gains in the industrial commodities sector over recent weeks.

The correction in the industrial sector comes to an end

In June, many industrial commodities prices moved to lows and have been correcting higher since. An improvement in economic numbers coming out of China, moderate economic growth in the United States, and the prospects for an end to quantitative easing in Europe based on better conditions have led to optimism in the industrial sector. The U.S. stock market has put up new highs across most indices, and bond prices have headed lower. The Q2 earnings season in the United States is just about over and results, on balance, have been supportive of share prices. The bottom line right now is that the bull market in stocks continues and demand for industrial commodities has increased, and their prices have responded accordingly.

Oil moves to $50 per barrel

On June 21, crude oil fell to its lowest level of 2017 when it traded at $42.05 per barrel, the lows since August 2016. Source: CQG

As the weekly chart highlights, nearby NYMEX crude oil futures have rebounded back and traded at just over $50 per barrel for the first time since May on the final trading day since July.

Crude oil is the most liquid, widely watched, and the raw material that powers the world. While the June 21 lows were the nadir for this year so far and oil declined below its former technical support level at $42.20 per barrel, the energy commodity only violated that level by 15 cents and has moved to the upside since. Crude oil back at $50 per barrel, which is a sweet spot for petroleum prices, is telling markets that economic conditions have improved, and demand for commodities increased at lower prices. $50 is a sweet spot for oil because it is a price that satisfies producers and consumers alike. At less than half the price the energy commodity traded at in June 2014, consumers are comfortable with the price level. At almost double the price in February 2016, producers can live with the current level of crude oil. The recent foray down to the low $40s showed that demand increased as product prices outperformed oil and supported the price of the world’s most closely watched commodity. Crude oil’s ascent from the lows is just one example of the rebound in industrial staples.

Iron ore rallies over 35% since June

Iron ore is the main ingredient in the price of steel. In June, iron ore fell to the lowest price level of 2017 when August futures traded to a low price of $52.63 per ton. Source: Barchart

The chart of August iron ore futures illustrates the rise from $52.63 on June 13 to $72.58 per ton on July 31. Iron ore has appreciated by 37.9% in less than two months as demand for steel, predominately from China, has picked up. Iron ore, like crude oil, has moved to a price level that is now higher to the highs of the year than the lows.

Copper moves through resistance

Perhaps the most dramatic move in the commodities market over recent weeks occurred in the copper market. Copper reached its low in January 2016 when the price traded to $1.9355 on the nearby COMEX futures contract. The red metal then entered into a 10-month period of price consolidation where copper futures traded between $2.00 and $2.32 per pound. Following the U.S. election in November, the price of copper spiked to $2.8230 in February and then spent the next five months consolidating between $2.45 and just over $2.70 per pound. However, in July, the nonferrous metal broke upside resistance. Source: CQG

As the weekly chart shows, copper broke to the upside in July and reached highs of $2.92 per pound on the final day of trading in July.

Copper is often a bellwether commodity, and many market participants call the red metal Dr. Copper as it diagnoses the health and overall state of the global economy over the course of history. At the end of July, copper was trading at the highest level since May 2015, and alongside crude oil and iron ore, the base metal is telling us that things are looking up when it comes to the demand for raw materials.

China is the world’s biggest commodities consumer in the world because of the Asian nation’s massive population and economic growth over the past four decades. Chinese stockpiling of commodities for building infrastructure often drives the prices of raw material markets, and during the summer of 2017, the industrial sector of the commodities market is telling us that conditions are picking up in China.

Lumber has been in a bull market since 2015

Finally, in the world of industrial commodities, wood is a basic building block of infrastructure. In the United States, demand for new home construction has supported the price of lumber since September 2015. Source: CQG

As the weekly chart of lumber futures highlights, the bull market has been in place for almost two years in the wood market as it has made higher lows and higher highs, reaching the highest level since way back in 2005 when nearby futures traded to $414.60 in April. Source: CQG

As the daily chart shows, after the April highs, lumber corrected to $334.10 in late June on the nearby futures contract as many other industrial commodities were moving lower. However, it has since rebounded to the $380 per 1,000 board feet level which is around $50 higher than last year at this time.

The moves to the upside in some of the most significant industrial commodities over recent weeks are an important commentary and reaction to global economic growth. While commodities prices are signaling increasing demand, they are also boosting the prices of those companies in the business of extracting the raw materials from the crust of the earth. In my next article on this topic for Seeking Alpha, I will review some of the impressive gains in the share prices of the world’s leading commodities producers.

Each Wednesday, I provide subscribers with a detailed report on the major commodity sectors covering over 30 individual commodity markets, most of which trade on U.S. futures markets. The report will give an up, down or neutral call on these markets for the coming week and will outline the technical and fundamental state of each market. At times, I will make recommendations for risk positions in the ETF and ETN markets as well as in commodity equities and related options. You can sign up for The Hecht Commodity Report on the Seeking Alpha Marketplace page.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities futures, options, and ETF/ETN products. Those long and short positions tend to change on an intraday basis.

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