Metals and mining shares have surged over recent weeks as a more optimistic view on supply and demand has boosted sentiment on the sector.
The FTSE 350 mining index has risen by around 29% since the middle of June, while the London Metals Index, a gauge of industrial metals, has climbed by some 18%.
Stronger-than-expected growth from China over the first half of 2017 has been a major factor underpinning the rally.
It´s difficult to overestimate China´s importance for the base metals market. The nation accounts for around 50% of global copper demand as well as being the world´s largest producer and consumer of iron ore.
Data released earlier this summer, showing Chinese growth had beaten expectations in the second quarter, was a bullish factor for the market. The 6.9% expansion compared with forecasts of 6.8%.
Strong demand for materials to meet the needs of increased investment in Chinese infrastructure have helped propel industrial metals higher this year.
Shares in London-listed miners Anglo American and BHP Billiton have risen by 38% and 26% respectively over the past three months.
At the same time, investors are wondering how sustainable the current rally is likely to be.
Factors at work
While firmer economic growth and strong demand from infrastructure projects have played a key role in the recent rise in metals prices, there are other factors at work.
For instance, the Chinese authorities are implementing production curbs on steel and aluminium this winter as they attempt to cut air pollution. There have also been moves to reduce unlicensed production capacity in China.
In addition to a more favourable supply/demand outlook, metals have also been pushed higher by dollar weakness. The latter has been a factor in driving precious metals such as gold higher of late, as the yellow metal is also priced off the dollar.
Last month, JP Morgan predicted aluminium would rise further during the fourth quarter of this year as the market continues to respond to Chinese supply-side reforms.
Similarly, in its latest research report, Fitch subsidiary BMI Research predicts it will be late 2017 or early 2018 before industrial metals begin to lose their lustre.
“The spike in infrastructure projects initiated over Q116-Q117 has continued to boost demand for building materials in subsequent months. We expect it will be late-2017 or early 2018 before a thinner project pipeline starts to drag significantly on metal prices,” says BMI in a report.
Copper rally overdone
At the same time, BMI warns that the recent rally in copper prices appears “overdone” amid elevated stock levels.
Over the past year, copper has rallied by 36%, rising from around $2.2 per pound to $3.0 per pound.
With the current rally in some of the industrial metals beginning to look long in the tooth, where should investors look next?
Precious metals could be the answer.
While both precious metals and base metals tend to receive a boost from dollar weakness, metals such as gold do well at times of uncertainty.
Rising concerns on North Korea have helped gold prices surge to an 11-month high this week. It follows North Korea´s latest nuclear test, which it claims to have been a hydrogen bomb.
Gold and other perceived safe havens were also on the rise last week after Pyongyang ordered missiles to be launched over northern Japan.
Further to run?
A combination of a weaker dollar as US inflation surprises on the downside and rising geopolitical worries favours the outlook for gold.
Gold is currently trading at $1,331 per oz, having risen by around 6% since early August, or 15% since the beginning of the year. Though with gold now trading at only slightly above the point it was at this time last year, the recent rally could have further to run.
“Disappointing US economic growth and persistently elevated political risk in the US and abroad will keep a lid on real interest rates and drive gold prices marginally higher in 2018,” says BMI.
However, the biggest catalyst for further increases in gold is likely to be any further flare up in geopolitical worries over the coming months. Gold opened 1% higher on Monday morning after North Korea claimed to have tested a hydrogen bomb.
Shares in London-listed gold miner Randgold have jump by 20% since early July.