Pockets of Strength in a Weak Metals Market
Weakness persists in most metals—and commodities in general—as investors continue to worry about the heightened risk of another recession. Despite the bad news, however, there are some promising areas of strength which we’ll discuss here.
Before we do, let’s start with the areas we’ve been avoiding. Industrial metals like copper, steel and aluminum just made fresh lows last week, with the former hitting its lowest level since 2020. “Dr. Copper,” the metal with a PhD. in economics, is especially worthy of mention.
Indeed, the extreme weakness in the red metal (down 30% since March) suggests the market views recession risk as a serious threat. The last time copper had a performance this bad, a recession did in fact follow.
Also worth mentioning is steel, the leading industrial metal and a linchpin of what until recently had been a soaring building construction market. That metal is now down over 30% in just the last two months after hitting a 10-year peak this spring.
Aluminum—that all-encompassing metal used in a broad swath of industries, from aerospace to automotive to building—is also in a state of extreme weakness. The white metal has underperformed even copper and steel and is down nearly 40% in the last four months.
The collective message of these metals seems to be that a manufacturing and construction slowdown of major proportions is likely ahead. Ironically, such a slowdown would help assuage recent inflation pressures on the economy. Perversely, however, it may not have much of an impact on the all-important price of crude oil and other fuels.
This leads us to our discussion of the areas of outperformance, beginning with the hydrocarbon sector. While steel and iron ore prices remain weak, the demand for steelmaking coal remains firm. This in turn is helping to boost the stock prices of some leading metallurgical coal producers, including CONSOL Energy (CEIX), Arch Resources (ARCH) and Alliance Resource Partners (ARLP). Of these three, ARLP appears the strongest and merits special mention.
Then there’s titanium, the metal in high demand by the U.S. military as a growing number of nations are now on a wartime footing. The metal is used in several defense sector applications such as submarines, naval ships, rockets, airplanes and drones.
Titanium prices are up over 100% from a year ago in reflection of the metal’s increasing military and tech-related applications. And while it’s not a defense-oriented stock, my favorite titanium play—Kronos Worldwide (KRO)—continues to show excellent relative strength and remains a staple of our portfolio, along with Valhi Inc. (VHI).
Finally, there’s everyone’s favorite alternate energy metal, lithium. The battery metal has been the hands-down top performer of the past year and is currently just under a record high (as measured by lithium carbonate prices).
To be exact, lithium is up a mind-blowing 450% over the past year. As it turns out, lithium is used in nearly every weapon system employed by the U.S. Department of Defense, and especially in portable field equipment, with the wartime environment providing an extra boost to the metal’s strength. Outperforming stocks in this industry include Sociedad Química y Minera de Chile (SQM) and Sigma Lithium (SGML), not to mention the relative strength in our favorite lithium tracker, the Global X Lithium & Battery Tech ETF (LIT).
This does mean that the above-mentioned areas of strength won’t suffer in the event of a recession. But in the weak overall environment for commodities, it’s imperative that we continue searching for areas where conspicuous strength is most evident. Along with conserving capital in the ongoing bear market, that remains our focus for now.
Updates
The Global X Lithium & Battery Tech ETF (LIT), my favorite lithium tracker, has perked up and is showing relative strength for the first time this year. LIT invests in companies throughout the lithium cycle, including mining, refinement and battery production, cutting across traditional sector and geographic definitions. Traders recently purchased a conservative position in LIT here using a level slightly under 69.70 as the initial stop-loss on a closing basis. BUY A HALF
After the recent technical improvement in gold, participants recently purchased a conservative position in the GraniteShares Gold Trust (BAR), our gold tracker of choice. We were stopped out of this trading position last week when the 17.94 level was violated on a closing basis. SOLD
Kronos Worldwide (KRO) is a leader in the production of titanium dioxide pigments, the world’s primary pigment for providing whiteness, brightness and opacity (used in two-thirds of all pigments). In Q1, the company reported another solid, consensus-beating quarter. Revenue of $563 million was 21% higher from a year ago, while per-share earnings of 50 cents beat estimates by 23 cents, driven by higher titanium dioxide prices. Titanium dioxide segment profit was a whopping 129% higher, due to higher selling prices and higher sales volumes. Going forward, analysts see sales rising 9% and earnings soaring 23% for 2022, which will likely prove conservative. Kronos also declared a 16-cent dividend (4% yield), in line with the previous one. Meanwhile, Deutsche Bank just raised its price target on the stock from 18 to 20. On May 19, I advised traders to take 50% profit in KRO after its 18% rally from our initial entry point. I also recommend raising the stop-loss on the remaining position to slightly under 17.50 (closing basis) where the 50-day line comes into play. HOLD A HALF
New Positions
Alliance Resource Partners (ARLP)is a producer of metallurgical coal (for the steelmaking industry) and thermal coal (for electrical utilities), with approximately 2 billion tons of coal reserves in several U.S. midwestern and southern states. Alliance is currently the second-largest coal producer in the eastern U.S. with additional mineral and royalty interests in the highly productive Permian, Anadarko and Williston basins. (The company markets its mineral interests for lease to operators in those regions and generates royalty income from the leasing and development of those mineral interests.) Additionally, Alliance provides terminal services for the transloading of coal, and develops and markets industrial and mining technology products and services. On the financial front, analysts foresee 55-ish percent revenue growth and 170-ish percent EPS growth in the next two quarters. Traders can purchase a conservative position in ARLP using a level slightly under 17.10 as the initial stop-loss on a closing basis.BUY A HALF
Portfolio
| Stock | Price Bought | Date Bought | Price on 7/5/22 | Profit | Rating |
| Alliance Resource Partners (ARLP) | 18.75 | 7/5/22 | 18.75 | 0% | Buy a Half |
| Global X Lithium & Battery ETF (LIT) | 75.8 | 6/28/22 | 71.75 | -5% | Buy a Half |
| GraniteShares Gold Trust (BAR) | 18.35 | 6/7/22 | 17.9 | -2% | Sold |
| Kronos Worldwide (KRO) | 15.25 | 4/12/22 | 18.25 | 20% | Hold a Half |
Buy means purchase a position at or around current prices.
Buy a Quarter/Half means allocate less of your portfolio to a position than you normally would (due to risk factors).
Hold means maintain existing position; don’t add to it by buying more, but don’t sell.
Sell means to liquidate the entire (or remaining) position.
Sell a Quarter/Half means take partial profits, either 25% or 50%.