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4 Ways to Invest in the Surge in Base Metals Demand

If you’ve been looking at the global base metals market, you’re likely noticing that the automotive and construction industries are in full rebound. There’s rising demand and tightening supplies for the materials used in these (and other) industries.

One industry that is a heavy consumer of metals is the electric vehicle (EV) market.

Among the metals most commonly used in EV production are copper, lithium, nickel and steel. The latter is the starting point for EV manufacturing and is increasingly used instead of aluminum for the production of the vehicle’s body and chassis (though aluminum remains a key material for battery production due to its lower weight).

The four investments we’re recommending below that that align each, are:

  • Steel: VanEck Vectors Steel ETF (SLX)
  • Copper: United States Copper Index Fund (CPER)
  • Lithium: Global X Lithium & Battery Tech ETF (LIT)
  • Nickel: iPath Series B Bloomberg Nickel Subindex Total Return (JJN)

Indeed, steel production is on the upswing again after mill closures caused by COVID-related shutdowns in 2020. According to the Wall Street Journal, “Steelmakers are straining to keep up with resurgent orders from U.S. manufacturers, just months after preparing for a long, pandemic-driven slump in steel demand.” And automakers are a big reason for the increased demand, which has pushed steel prices significantly higher.

Investing in Steel with VanEck Vectors Steel ETF (SLX)
To give you some idea of just how “hot” the steel market is right now, the price for benchmark hot-rolled steel is $850/ton, well above the pre-pandemic level of $570 in March before the nationwide shutdowns began. One way to participate in the steel bull market is through the VanEck Vectors Steel ETF (SLX), which seeks to replicate the price and yield performance of the NYSE Arca Steel Index (STEEL)—and which in turn is intended to track the performance of companies involved in the steel sector.

With a vast majority (86%) of steel buyers who were polled in November by an industry source expecting another round of price increases from steel mills in the coming months, the likelihood is that prices will continue to rise in 2021, which should bode well for SLX.

Investing in Copper with United States Copper Index Fund (CPER)
Along with steel, EVs also need lots of copper and can utilize up to three-and-a-half times as much of the red metal compared to a traditional gas-powered passenger car. And while conventional cars use around 18-to-49 pounds of copper, EVs typically contain around 85 pounds.

It’s also worth mentioning that copper has been one of 2020’s best-performing commodities and stands to benefit from continued strong demand in the coming year—both from China’s resurgent industrial economy as well as from recovering automobile sales.

Along these lines, the research consultancy Wood Mackenzie has noted that copper “is a cornerstone of the EV revolution” and is heavily used in charging stations and other EV applications due to its high electrical conductivity, durability and malleability. Consequently, consumption of the red metal for passenger EVs is projected to increase by nearly 700% over the next two decades.

One of the best investment vehicles for participating in the copper boom, aside from investing in individual copper mining stocks, is the United States Copper Index Fund (CPER). This ETF is designed to track the performance of the SummerHaven Copper Index Total Return, and is a convenient, less expensive method for participants to access the returns of a portfolio of copper futures contracts.

Investing in Lithium with Global X Lithium & Battery Tech ETF (LIT)
Along with copper, lithium is a key commodity used in EV batteries. Lithium demand is expected to double by 2024, thanks to EV market growth. Moreover, BloombergNEF estimates that by 2030, lithium demand for passenger EV production will rise by nearly 500%.

A key to this bullish demand forecast is China, which is ranked #1 in the world among countries most heavily involved in the lithium-ion battery supply chain in 2020. And with lithium consumption expected to accelerate in 2021, the companies that produce lithium and lithium-ion batteries are well positioned to outperform.

An excellent way to capture this anticipated growth is via the Global X Lithium & Battery Tech ETF (LIT). LIT invests in the full lithium cycle, from mining and refining the metal to battery production. According to the fund’s prospectus, it “seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Solactive Global Lithium Index.”

Investing in Nickel with iPath Series B Bloomberg Nickel Subindex Total Return (JJN)
A final base metal worth discussing is nickel. Analysts expect nickel prices to increase in 2021 on the back of rapidly growing demand from EV battery manufacturing. Nickel, which is also used in steel manufacturing, has been on a rip-and-tear this year, thanks largely to China ramping up stainless steel production along with an Indonesian export ban-related supply crunch. What’s more, the need for battery-grade nickel continues to grow, with experts forecasting a 10% demand bump for 2021 (which is likely to prove too conservative).

While nickel-related ETFs are in short supply, one of the best ways to grab a piece of the nickel bull run is via the iPath Series B Bloomberg Nickel Subindex Total Return (JJN). This is actually an exchanged-traded note (ETN), not an ETF. Liquidity is an issue due to the extremely low daily trading volume average, so there’s more leverage risk involved. But with nickel prices in the early stages of what looks to be a fundamentally-induced rising trend, having a small position in JJN is probably a good idea if you want full exposure to the anticipated 2021 base metals boom.