Is it a Good Time to Invest in Base Metals?

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Submitted by Sandy Miguel as part of our contributors program.

Is it a Good Time to Invest in Base Metals?

Base metals can provide a safe haven for investors, especially if they intend to diversify plays and hedge against losses. With gold losing its shine from time to time, investors may want to consider placing their portfolio in base metals as well.

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Base metals have shown signs of strength recently as the dollar pulled back, according to a report on News.com.au. The London Metal Exchange’s (LME) three-month copper contract climbed 0.4 percent to US $6,692.04 per metric ton on Tuesday’s after-hours trading session.

Meanwhile, aluminum was up 0.6 percent at $2,045.00 per ton, and lead added 0.2 percent to $2,045.00 per ton. Nickel also rose by 1.1 percent to $15,425 per ton and tin edged higher by 0.7 percent to $20,195 per ton.

The report added that Zinc reached $2,257 on Tuesday, representing a 1.1 percent. French banking firm BNP Paribas, the report noted, was particularly bullish on zinc setting a target price of $ 2,500 per ton for the base metal by the end of H2 next year.

Sector Rebound

Why are base metals on an upswing? For one thing, the dollar pulled back, and for another, a shortage is looming large on the horizon. Reuters found through a recent poll that a deficit in global supply and demand next year could indeed propel base metal prices and ultimately lift the industrial metals complex on the LME.

“Base metals have been relatively resilient, and the reason for that is that some at least have distinct supply-side support, which is simply not there for oil,” Stephen Briggs, metals strategist at BNP Paribas, told Reuters. “There are good reasons to make reasonably bullish cases for some of the base metals—zinc and nickel and to some extent aluminum.”

Conversely, The Australian reported that there’s an upcoming nickel surplus in the sector. Robin Bromby, a columnist at the paper, noted the Commonwealth Bank’s warnings that a nickel surplus could happen from 2015 to 2016. The surplus was due to Indonesia’s export ban on unprocessed mineral, which makes sense because it was one of the world’s major producers and exporter of high-grade nickel ore.

While most analysts maintain that base metals could allow the complex to outperform this year, one analyst noted that some factors could drive growth to the complex, considering the huge upside potential of metals mining, exploration and trading. All the “downgrades,” negative sentiment and “warnings” from the International Monetary Fund are over, and there’s only one direction for the segment to go but up, according to Gayle Berry of Jefferies Bache.

Good News Abound

The future is bright indeed for the sector especially for mining firms engaged in the exploration and development of base metals. Amur Minerals Corporation (LON: AMC), for instance, has recently announced that Russia’s Ministry of Economic Development has approved its application for a “Detailed Exploration and Production License” for its Kun-Manie nickel, copper, sulphide project in the country.

Amur Minerals Corporation made headlines this year after it announced in March that it would be using a blimp to transport equipment and products back and forth its Siberian mining operations. The company enlisted Worldwide Aeros Corp. to build two airships for the company that can carry loads of up to 250 metric tons. Amur Minerals closed Wednesday at 5.02 GBX.

Highland Gold Mining Limited (LON: HGM) also acquired a license for the exploration and mining rights of the Lower Horizon of the Mnogovershinnoye (MNV) deposit in the regional capital of Khabarovsk Krai, Russia. According to the company’s statement, the license will allow Highland Gold to access the lower levels of the Main and Intermediate ore zones, the site of the MNV’s rich ore deposits. Highland has been focused on running its mining operations in MNV.

The acquisition cost Highland a bid price amounting to US $191,000, the company said. The site has the potential to yield 18 tonnes of gold, the company noted.

In the United States, Asanko Gold (NYSEMKT: AKG) and Paramount Gold and Silver (NYSEMKT: PZG) led the mining stocks rally, having increased by 10.9 percent and 9 percent respectively during Wednesday’s trading session, according to NASDAQ. Barrick Gold Corp (TSE: ABX) also rose 0.30 percent to $13.25 on Tuesday, recovering its October losses.

The Problem with Dollar Gains

Dollar gains appear to be the only primary threat that’s standing by to pull the base metals segment down. According to Reuters, dollar strength could make “raw materials priced in the dollar more expensive to buyers using other currencies.”

According to an Investing.com report last month, dollar has been steadily gaining due to a number of factors, including upbeat jobs data in September. Haywood Securities Mining Analyst Stefan Ioannou told The Mining Report (TMR) in an interview posted on the site that another reason for the dollar value increase is the “strengthening U.S. economy or at least the perception of one.”

When asked by TMR as to when the dollar trend will end, Ioannou said it depends on the Federal Reserve’s decision to increase interest rates. “With quantitative easing seemingly over, which is still arguable, the big question for the U.S. economy is when and by how much will interest rates be increased,” he said.

“Elsewhere in the world, the other major economies seem to be, if not slipping, not really growing significantly. Europe is kind of flat. China is still growing but not nearly as fast as people had hoped for or expected. As a result, most world currencies are down relative to the U.S. dollar,” he added.

A stronger, trade-weighted dollar doesn’t bode well all the time especially for companies whose operations and sales revenues come from overseas, according to Bloomberg. Citing information from JPMorgan Chase & Co, Bloomberg said most companies comprising the Standard & Poor’s 500 “get 47 percent of their sales abroad.” Companies hurt by the stronger dollar include Amazon.com Inc., International Business Machines Corp., McDonald’s Corp. and Apple Inc., Bloomberg noted.

With analysts predicting a possible deficit in supply for base metals, base metal prices will certainly swell. Demand for base metals for industrial uses will continue to steadily rise, especially in emerging countries that foreign investors are eyeing to set up offices.

Additionally, aside from generating sizable profits, investing in commodities like base metals could shield your portfolio against inflation. Investors should grab the opportunity while the prices are still affordable.