Low Inventories, Supply Shortages Help Strengthen Industrial Metal ETFs

Global economies are running on historically low inventories of some of the most important raw materials that keep things going. With an ongoing disparity in demand and supply that continues to flame inflationary pressures, investors can focus on some targeted commodities-related exchange traded funds to capitalize on the shortages.

The supply problems are particularly noticeable in the metals market where the spot prices of several contracts on the London Metal Exchange are trading higher than contracts for later delivery, reflecting a backwardated market as traders pay up to secure immediate supply, the Financial Times reports.

“This is the most extreme inventory environment,” Nicholas Snowdon, analyst at Goldman Sachs, told the Financial Times. “It’s a completely unprecedented episode. There is no supply response.”

The disparity between supply and demand has widened in the pandemic recovery process as economies roar back to life with copious amounts of fiscal and monetary stimulus fueling the growth but still suffering supply chain disruptions due to the lingering effects of the COVID-19 pandemic.

“Inventories are low, not just in exchange warehouses, but through the entire supply chain,” Michael Widmer, analyst at Bank of America, told FT, highlighting the difficulties in securing aluminum stocks. “There is limited safety buffer in the system.”

Consequently, the supply shortage has helped the Bloomberg Commodity Spot index, a key gauge of raw materials, climb more than a tenth since the start of 2022 and hit a record high in February. Nine of the 23 futures contracts that are in the index are now trading in backwardation, according to data from Refinitiv.

Long-term supply is also in question after a lack of funding for new projects or new mining operations, along with severe weather conditions and the pandemic-induced supply chain constraints.

Investors looking to get exposure to base metals without having to pick and choose which metal to focus on can have it all with the Invesco DB Base Metals Fund (DBB). The fund seeks to track changes, whether positive or negative, in the level of the DBIQ Optimum Yield Industrial Metals Index Excess Return, plus the interest income from the fund’s holdings of primarily U.S. Treasury securities and money market income less the fund’s expenses.

Additionally, the abrdn Bloomberg Industrial Metals Strategy K-1 Free ETF (BCIM) seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the Bloomberg Industrial Metals Total Return SubindexSM. The index consists of commodities futures contracts that cover metals like aluminum, copper, nickel, and zinc.

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