Factors influencing base metal prices
Base metal prices are influenced by a variety of factors that reflect both global economic conditions and industry-specific trends. One important factor is China’s economic situation. As the largest consumer and producer of base metals, China plays a fundamental role in setting global prices. The balance between supply and consumer demand is also an important factor that directly affects metal prices. Increased industrial and manufacturing activity typically results in increased demand for base metals, causing an increase in prices. Additionally, geopolitical stability in major producing countries may impact production levels and lead to further volatility in the market. Data on stock levels on the London Metal Exchange (LME) is also important as it helps traders assess the balance between supply and demand in the market. Additionally, base metals are priced in US dollars, so fluctuations in the dollar index can affect their attractiveness. The monetary policies of major central banks influence economic conditions, thereby affecting both the demand and prices of these metals. Furthermore, economic data from the US and China is extremely important as key data released from the US and China can have a significant impact on market sentiment and prices. Finally, mine closures and reopenings can lead to changes in production capacity and cause immediate changes in supply.
Current market trends for base metals
The dollar index is currently at a multi-week high of around $107, making industrial metals less attractive given that these products are denominated in dollars. China’s economic weakness and lack of substantial economic stimulus are keeping base metal prices in check. Additionally, the possibility of tariffs on China following Donald Trump’s presidential election victory has changed market sentiment for copper and other metals. Continued geopolitical tensions, particularly between Russia and Ukraine, and in the Middle East are also likely to maintain price volatility.
Trading base metals using LME inventories and economic indicators
Successful trading of base metals requires consideration of various economic indicators that influence prices. Key economic data such as ISM Manufacturing Purchasing Managers Index (PMI), Durable Goods Orders, GDP data, Construction Spending, Caixin Manufacturing PMI, and Industrial Production are critical in developing trading strategies. In this context, we discuss ISM Manufacturing PMI data to better understand the copper movement.
The ISM Manufacturing PMI is a key indicator for base metals and is released once a month in the first week. Traders pay close attention to this data because it serves as a leading indicator of economic health. Companies often react quickly to market conditions, and purchasing managers provide up-to-date and relevant insight into the company’s economic outlook.
Latest data (November 1, 2024):
– Actual: 46.5
– Expected: 47.6
– Previous: 47.2
The impact on base metals was negative as actual data was lower than expected, leading to a more than 6% correction in MCX copper from November highs. It is important to note that price trends and global sentiment should also be driving such a big move.
LME inventory data: In India, LME inventory data is updated at 2:30 PM during standard time and 1:30 PM during daylight saving time. LME numbers are updated for all base metals. Let’s use copper as an example. LME data indicates the amount of inventory available in the warehouse. A significant decrease in inventory indicates a decrease in supply, which may cause prices to rise and vice versa. For example, if inventories decreased by 10,000-15,000 tonnes per day and then by 40,000 tonnes today, traders are likely to react quickly to this news and a potential supply shortage in the market could push prices higher. It shows that there is.
Base metals present great opportunities for traders. They are often undervalued in commodity trading. As mentioned earlier, base metals are more commonly available and easier to mine than precious metals. This reduces volatility in the base metals market, and prices typically trade within a narrow range, making it easier for traders to identify support and resistance levels. By using the right technical tools and staying up to date with the latest economic news, trading base metals is easier than trading precious metals or oil.
Now that we understand the basics of base metals, let’s take a closer look at the technical aspects.
As mentioned earlier, a variety of factors and economic data can influence the price of base metals. Additionally, there are some technical indicators that can help you trade these prices. One of the most appropriate indicators based on price fluctuations is Bollinger Bands.
Bollinger bands are made up of three lines. The middle line represents the moving average, and the outer two bands indicate price volatility. When price crosses or touches a band, it indicates overbought or oversold conditions and helps traders identify potential reversals or trends. Bollinger Bands are particularly effective for base metals, as these markets often trade within predictable ranges influenced by supply and demand factors. Bands help identify overbought or oversold conditions, allowing traders to spot potential reversals or breakouts amid volatile but bounded price movements.
strategy
If the price rises above the top of the Bollinger Bands, it indicates an overbought zone. Wait for the next candle to return within the band, then take a short position and place a stop-loss order above the previous candle’s high. This strategy works best on 4-hour charts. We recommend backtesting across all base metal instruments to assess its effectiveness and usefulness in trading.
(Author Deveya Gaglani is a Commodities Research Analyst at Axis Securities. Views are own)
