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Why Base Metal ETFs Have Strength
By Tom Lydon on October 1, 2009 | More Posts By Tom Lydon | Author's Website
Existing overcapacity of base metals in China’s reserves are alarming officials there, and they are curbing this with new rules. Is this news going to interrupt the run that related exchange traded funds (ETF) have enjoyed?
China’s cabinet is no longer approving new projects for energy-intensive aluminum production for three years. Chuin-Wei Yap and Juan Chen and Yue Li for Dow Jones Newswires report that the State Council, also issued new rules to contain excessive capacity in seven other sectors, including revisiting a years-long campaign to curb steel output.
The ban on new aluminum capacity, a popular metal, is primarily meant to rein in the energy-guzzling and hard-to-control industry. The markets have so far shrugged off the news.
The Chinese markets and the U.S. dollar weakness has helped prop the base metals market up, and the underlying demand is strong indicator that emerging markets have some resilience to the economic downturn, says Dorothy Kosich for MineWeb.
One analyst notes that base metals prices have hit “mid-cycle” levels, something that normally takes years after a global downturn. The analyst also predicts that copper will be the top performer among base metals, and forecasts China’s consumption to grow 20% this year.
Some related ETFs and exchange traded notes (ETNs):
- iPath Dow Jones AIG Copper TR Sub-Index ETN (JJC): up 91.2% year-to-date
- iPath Dow Jones AIG Lead TR Sub-Index ETN (LD): up 119.3% year-to-date
- Market Vectors Steel ETF (SLX): up 80% year-to-date
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Interesting piece of information that I’m sure metal investors need to pay attention to. The question though is how rigidly China’s leaders will stay to these guidelines. Restricting aluminum output for 3 years is a very big step as obviously the demand for base metals is very volatile. Would China stick to this policy if the demand for aluminum outweighs capacity? And how should investors price this risk into their metal investments?