Track An Industrial Metals Commodity Index
An investor looking to diversify into real assets will want to ensure there is an industrial metals commodity index component included as part of their diversification plans.
Given the importance of industrial metal commodities to global infrastructure growth, this component does represent a significant proportion of most major commodity indices.
Mining company Rio Tinto has outlined in a seminar and report how it sees strong markets for its core products of iron ore, aluminium and copper up to around 2022.
You can now subscribe to the free Commodity Universe Ezine below, and get the latest articles on the commodity sector . Just your first name and email. It's as easy as 1-2-3! The main driver for this projected strong demand is the massive program of urbanisation going ahead in the emerging economies, according to the company.
The tightness of supply and demand of the industrial metals will lead to upward pressure on prices and there is always a long lead time between a decision to develop a mine and when it starts to ship the finished metal to warehouses.
So how do the various commodity indexes reflect the price of industrial metal commodities?
Take, for example, the S&P GSCI (Goldman Sachs) Composite index where the industrial metals group represents (as at 14 July 2008) a relatively small 5.80% of the index value.
The surge in crude oil prices over recent months will have contributed to this skew in the weightings, so that the energy component is a huge 78.9% of the index (14 July 2008).
Within the industrial metals 5.8% share, the breakdown is aluminium (2.21%), copper (2.48%), lead (0.26%), nickel (0.48%), zinc (0.37%).
This share for the base metals puts this group behind energy (the largest) and agriculture (or softs) in second place with 10.76%.
The S&PGSCI also offer variations where there are lower percentages of the energy commodities and correspondingly higher allocations for industrial and precious metals, livestock and agricultural commodities.
For example, the GSRE (Reduced Energy) Index has industrial metals making up 9.57%, while the GSLE (Light Energy) has 14.20%.
Meanwhile, the GSCI Non-Energy Index has industrial metals contributing 27.46%, after agriculture (50.99%) but ahead of the precious metals (8.38%) and livestock (13.17%).
If there was a sudden and significant correction in crude oil prices from the $130 -$135 level (May-June 2008), the S&PGSCI, made up almost 4/5ths of hydrocarbons, would fall disproportionately, even when other commodity prices are relatively steady.
As with the GSCI, the RICI is dominated by energy ( 44%), and industrial metals contribute 14%, with aluminium (4%), copper (4%), zinc (2%), lead (2%), nickel (1%) and tin (1%). Another industrial metals commodity index perspective is provided by The Dow Jones AIG Commodity Index (DJ AIGCI) where no single commodity group can be less than 2% of the index.
This index is also composed of futures contracts traded on US exchanges except for the industrial metals aluminium, nickel and zinc which are traded on the London Metal Exchange (LME).
Investors and traders can gain exposure to commodities using vehicles called exchange traded funds (ETFs) or exchange traded commodities (ETCs).
These funds can follow the movements of some of the mainstream commodity indices and act as an alternative to trading futures or options.
Track the sub-sector or an individual metal
It is possible, for example, to have exposure to the DJ AIG Industrial Metals Sub-Index or even to the single commodities, like aluminium, in the DJ AIG Aluminium Sub-Index using various ETF’s or ETC’s.
This fund which tracks the above industrial metals commodity index had a weighting for the four metals in January 2007 as follows: aluminium (38%), copper (33%), zinc (15%), and nickel (14%).
It is also possible to gain exposure to individual metals, for example, using the ETFS Copper (LSE:COPA) secured note to track the DJ-AIG Copper Sub-Index.
Please note the ETFS securities are designed only for use by investors in the UK and certain EU states, including France, Germany, Holland and Italy.
Looking Ahead
With further development of the commodity and financial markets, and greater participation by large pension funds, there are likely to be more vehicles designed to track the movements of an industrial metals commodity index.
Whether you are a US based investor or within the EU, there is a strong possibility that new funds will be launched to meet demand for greater exposure to important commodity sectors such as industrial metals.
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