What are base metals stocks?

Outside of the major industrial metals minor and niche metals include rare earth metals with highly specialised applications, and other niche materials such as cobalt. Technically a subcategory of non-ferrous metals but considered a market in their own right, these metals have specialised applications. These relatively high-cost, scarce metals have grown in importance due to technological developments and the energy transition. These include lithium, cobalt, manganese, and rare earth elements essential for electric vehicle batteries, electronics, and renewable energy infrastructure. Rare earth metals, as the name suggests, are rarer and more difficult to find than iron or the main non-ferrous metals. Often, as in the case of cobalt and the Democratic Republic of the Congo, supply is highly concentrated in a single country.

Base metals miners differ significantly from precious metals companies in their relationship to economic activity. While gold miners often perform countercyclically, rising during periods of economic uncertainty as a flight to safety, base metals producers are highly cyclical, performing strongly during economic expansion and suffering during contractions.

This relationship with the business cycle makes base metals stocks potential beneficiaries during economic growth phases but vulnerable during downturns. Supply often lags demand due to the high costs and slow pace of exploration, which can create demand (and price) spikes during periods of under-supply and long gluts with falling prices when new production comes online.

Regulatory risk and political decisions around climate change and sustainability also have an influence on the profitability and in some cases the possibility of new mining projects.

The base metals market has a long-standing oversupply issue, creating a challenging environment for mining companies and shareholders. This imbalance stems from several structural factors affecting the industry. Major capacity expansions initiated during the period of sustained high prices in the early 2010s have continued to deliver production increases even as demand growth has slowed. Chinese producers in particular have maintained high output levels despite weakening domestic consumption, contributing significantly to global surpluses in aluminium, steel and copper markets. Metals stocks are often subsidised directly or via tariffs, making them unresponsive to changes in demand.

This oversupply has exerted downward pressure on commodity prices, squeezing profit margins across the sector. US-listed mining companies have responded with cost-cutting initiatives, capital expenditure reductions and layoffs, but these measures have provided only partial protection against the supply-demand imbalance. Investors should pay close attention to the profitability of mining stocks and the health of their balance sheet.