Base Metals

What Are Base Metals?

Base metals are common metals that tarnish, oxidize, or corrode relatively quickly when exposed to air or moisture. They can be contrasted with precious metals and are widely used in commercial and industrial applications, such as construction and manufacturing.

Examples of base metals include lead, copper, nickel, aluminum, and zinc.

Understanding Base Metals

The term base metals likely arose because these materials are inexpensive and more commonly found than precious metals, such as gold, silver, and platinum. Base metals are often more abundant in nature and sometimes easier to mine. That makes base metals far less expensive for use in manufacturing than precious metals.

However, base metals are invaluable to the global economy because of their utility and ubiquity. Copper, for example, is a leading base metal that is often called the "metal with a Ph.D. in economics" or "doctor copper."

Movements in the price of copper can provide information about the health of the global economy due to its widespread use in construction. Economists sometimes use copper prices as a leading indicator of global economic growth. If the demand for copper is growing and prices are rising, then the global economy may be improving. Conversely, a fall in the price of copper can provide a warning that economic activity is slowing in crucial areas of the economy, such as homebuilding.

Advantages and Disadvantages of Base Metals

The primary advantage of base metals is that they are relatively inexpensive. Base metals serve many purposes, such as construction, as well as or better than precious metals.

In addition, some base metals have unique properties that cannot be duplicated by other metals. For example, nickel is one of the major components of stainless steel, zinc goes into galvanizing steel as a protection against corrosion, and the Roman Empire used lead for many purposes, including pipes, bathtub linings, cosmetics, and paints.

Base metals suffer from several significant drawbacks, too, all of which make them less suitable as currencies than precious metals. The first disadvantage is that they are usually not valuable enough to be a compact store of value. For example, lead was selling for less than one U.S. dollar per pound in four of the eight years from 2013 to 2020. Having to haul 50 pounds or more of lead to the store to buy groceries was always impractical, while gold and silver coins worked well. As late as the 1960s, many U.S. coins still contained silver.

The other notable disadvantages of base metals are their chemical properties and price volatility. Because they oxidize and tarnish more easily, base metals make much less durable currencies. It is common to find corroded pennies in the United States that are only a few decades old. They corrode so quickly because they are mainly composed of the base metal zinc. On the other hand, gold coins from thousands of years ago are often still in relatively good shape.

The prices of base metals are also usually more volatile because of their widespread use for industrial purposes. When industrial demand dries up, the prices of base metals can plummet.

Base Metals Futures Contracts

Several exchanges around the world offer contracts to trade in base metals, but the hub of international trading remains the London Metal Exchange (LME). In the United States, the Chicago Mercantile Exchange (CME) also offers base metal futures contracts.

The CME's physically delivered futures contracts are designed to meet the needs of the evolving international marketplace. They provide a cost-competitive vehicle to manage price risk for the whole value chain.

Both producers and consumers use futures markets to hedge their price exposure to base metals. Copper miners, for instance, may sell copper futures in anticipation of a mining haul in order to hedge the risk of prices falling before it is ready for market. Electronics producers, on the other hand, may buy copper futures to hedge the risk of prices rising since copper and copper wiring are key components of computer and electronic devices.

By hedging, both the producer (seller) and consumer (buyer) of copper are immunized to price fluctuations in the metal while the futures contract is still held and in force.

How to Invest in Base Metals

For those looking to trade in base metals or add some to a diversified investment portfolio, the most direct way is to use the futures market. The CME lists several base metals contracts including copper, aluminum, lead, and zinc.

If you do not have access to derivatives markets, you can instead look to commodities exchange-traded funds (ETFs) that hold base metals. The Invesco DB Base Metals ETF, for example, tracks an index of base metals and is designed for investors who want a cost-effective and convenient way to invest in commodity futures. The index is a rules-based index composed of futures contracts on some of the most liquid and widely used base metals — aluminum, zinc, and copper (grade A).

Similarly, the iPath Bloomberg Industrial Metals Subindex Total Return ETN tracks the prices of four futures contracts on industrial metals: copper; aluminum; nickel; and zinc. Other options include the SPDR S&P Metals & Mining ETF, which is made up of companies involved in the metals and mining industries, and the iShares U.S. Basic Materials ETF, which consists of companies engaged in producing basic materials.

There are also exchange-traded products that track a single commodity, such as the United States Copper Index Fund.

An indirect way to gain access to base metals is by owning the stocks of mining companies that produce them. Alcoa, for instance, is a large aluminum producer in the United States.

Frequently Asked Questions

Is iron ore a base metal?

While iron corrodes and rusts when exposed to water and air, base metals exclude iron by referring only to non-ferrous industrial metals.

What are the most expensive base metals?

Tin tends to be the most expensive base metal, ton-for-ton, followed by nickel, copper, and then zinc.

Can you take delivery on base metals?

If you own an expiring CME futures contract on a base metal and do not close it out or roll it over to a longer-dated contract, you will be obliged to take physical delivery of the metal.

How do you hedge steel?

Steel is an alloy made up mostly of iron with a small amount of carbon (~2%) and around 1% various other trace elements. Because steel contains iron, it would not be a base metal. That said, iron ore futures do trade on the CME and other commodities exchanges, which can be used to hedge a position in steel.