A rise in the global population, growth in the Chinese economy,
urbanization of other Asian countries and the increasing
requirements of developed countries have created an unprecedented
demand for industrial or base metals given their usage in a wide
variety of applications in the construction and manufacturing
businesses. However, of late, tepid global economic growth and a
slowdown in the Chinese economy have emerged as major headwinds for
the global metal industry.
Let's have a look at how some of the base metals have fared so far
and the road ahead -
Iron Prices Going Downhill
Iron ore prices had a bullish run in 2013, in contrast to other
base metals, thanks to heightened demand from steel end-consumers,
particularly in the Chinese construction sector. However, the
scenario changed dramatically in 2014. In March, the industry was
dealt a severe blow, with iron ore prices suffering the sharpest
one-day drop since the 2008-2009 financial crisis, tumbling 8.3% to
close at around $105 per ton. This represented an 18-month low for
iron ore prices.
Since the first quarter, iron ore prices had somewhat recovered but
again plunged to $89 per ton in June -- the weakest performance
since September 2012. In August, prices again slid below the $90
per ton threshold.
So far this year, the commodity has lost 33% of its value. Overall,
prices have been impacted by myriad reasons such as excessive
inventory along with abundant supply of iron as mining companies
increased their output, as well as tight credit and slow economic
growth in China. Global steel production, as per the World Steel
Association, rose by a meager 2.4% in the first seven months of
2014, mainly dragged down by a slowdown in China's output that
affected demand for iron ore, its main ingredient.
The lowering price trend has resulted in the closure of high cost
iron ore miners and the reduction of exports from non-traditional
suppliers such as Indonesia, Mexico and Vietnam. Falling iron ore
prices have impacted the second-quarter results. Mining giant Vale
) reported a 15% plunge in its second-quarter profit due to the
fall in prices of iron ore, its main product. However, its peers
BHP Billiton Limited (
) and Rio Tinto plc (
) reported an increase in earnings mostly attributable to their
cost reduction efforts which helped mitigate the effect of lower
Threat of Oversupply Looms for the Iron Industry
There is a threat of oversupply in 2014 as major iron ore
producers, Rio Tinto, BHP Billiton, Vale and Fortescue Metals Group
Limited (FMG.AX) have ramped up production. They intend to continue
exploring for iron ore in Australia despite lower growth forecasts
for China and weaker iron ore prices, betting on continued strength
in iron ore demand over the long term. Thus, Australia, the world's
top exporter of iron ore, will rev up its shipments.
Brazil, the second largest explorer, will follow suit. Vale, which
alone contributes almost 85% of Brazil's iron ore, is expected to
increase its iron shipments by 22% in the second half of fiscal
2014 compared with the first half. In case this excess supply is
not matched by adequate demand, it will expose the market to a risk
of further decline in prices.
Per the World Steel Association, global apparent steel use is
expected to increase 3.1% in 2014, following the 3.6% growth in
2013. In China, apparent steel use had soared 6.1% in 2013 on
support from government infrastructure investment. However, this
year the government's efforts to rebalance the economy will lead to
3% growth in apparent steel usage in 2014.
An impending slowdown in China's growth is bound to affect prices
as China is currently the largest producer of steel and
consequently the largest consumer of iron ore, accounting for
around 60% of the global seaborne market. Thus the mismatch between
the excess supply and demand for iron ore will keep iron ore prices
subdued in the near term.
Prices Regain in 2014 Following a Lull in 2013
In 2013, aluminum prices slid and particularly in the fourth
quarter, London Metal Exchange (LME) aluminum prices fell to a
four-year low, given the oversupply of the metal in the market
(evidenced by large aluminum inventories in LME warehouses). Supply
outpacing demand led to the dismal performance, which was
aggravated by rising inventories.
After hitting a four and half year low of $1,675 per ton in
February, the base metal has dramatically regained ground surging
24% to over $2,000 in August. The upward trajectory was driven by a
10% drop in LME inventories so far this year and tightening of
aluminum supply due to production curtailments by aluminium
producers. Furthermore, production cut down in Brazil, as
electricity prices surged to records this year, led to the supply
Aluminum companies are benefitting from the rising aluminum prices.
The world's largest aluminum producer, Rusal, swung to profit for
the first time in the last five quarters. U.S. aluminum giant Alcoa
) also reported better-than-expected results with adjusted earnings
skyrocketing 157% from the year-ago quarter.
Future of Aluminum Industry Lies in Automotive and
After aluminum prices bore the brunt of chronic surplus, the global
aluminum industry is going through a substantial change in the
supply-demand picture. In the first six months of 2014, Rusal has
effectively cut aluminum production by 10.8%. Likewise, Alcoa has
taken up a number of restructuring measures (including closure of
smelters) and is aggressively pursuing cost-cutting actions.
Alcoa, during the second quarter, completed the curtailment of
147,000 metric tons of smelting capacity in Brazil at Sao Luis
(Alumar) and Pocos de Caldas. In August, Alcoa announced that it
will permanently shut down its Portovesme primary aluminum smelter
in Italy that will cut the company's smelting capacity by 150,000
metric tons to 3.6 million metric tons a year. Alcoa has set the
goal of lowering its position on the world aluminum production cost
curve to the 38th percentile by 2016. Once all announced
curtailments and closures are executed, Alcoa will have its
operating smelting capacity reduced by 1.2 million metric tons, or
28% since 2007.
On the demand side, aluminum consumption is expected to improve on
a global basis spurred by the automotive and packaging industries
-- the key consumer markets. The automobile market is also becoming
increasingly aluminum-intensive, given the metal's recyclability
and light-weight properties. The global push to improve fuel
efficiency in vehicles is expected to more than double the demand
for aluminum in the auto industry by 2025.
The airline industry is also expected to boost demand for the
metal. To capitalize on the lucrative aerospace market, Alcoa has
agreed to buy U.K.-based leading jet engine components maker Firth
Rixson, a significant milestone in its portfolio transformation
strategy. It reinforces the company's aerospace business and
strongly places it to capture additional growth in this developing
market through a broad spectrum of high-growth, value-add jet
engine components. Alcoa's recent $1.1 billion agreement to supply
key parts (including forgings) for Pratt & Whitney's engines
also underscores Alcoa's continued efforts to profitably grow its
Following China, which accounts for over 40% of the global aluminum
consumption, India appears promising given its current low level of
aluminum consumption and high urban population growth. With demand
remaining strong and the industry pulling the reins on supply, the
aluminum market is likely to witness deficits for a prolonged
period which creates a supportive backdrop of high aluminum prices.
Copper Price Makes a Comeback
For the most part of 2013, oversupply, lack of demand and growing
bearish economic outlook for China, the world's largest consumer of
in check. During the first half of 2014, copper prices declined
based on concerns about slowing growth rates in China and an
outlook for higher near-term supplies. During the mentioned period,
copper prices have averaged $3.14 per pound, down 8.2% over the
prior-year comparable period.
In August, copper prices made a comeback, rising 3.3% last week
amid signs of a strengthening economic recovery in the U.S which is
expected to support strong copper demand, being the world's
second-biggest consumer of industrial metals. However, weakness in
the Chinese economy will continue to be a drag considering that it
accounts for about 40% of the world's annual demand.
Copper Demand Will be Driven by Pickup in Economic
Along with excess supply that has depressed copper prices, miners
have been plagued with rising costs. Copper companies have reduced
their budgeted future capital expenditures, exploration and other
costs and are looking to rid themselves of some of their saleable
Notwithstanding the current volatility in prices, we have a
long-term bullish stance on copper, supported by its widespread
use, limited supplies from existing mines and the absence of
significant new development projects. In the near term, prices will
be influenced economic activity in the U.S. and other
industrialized countries. Revival in demand from China will also
act as a catalyst.
Sector Q2 Earnings Scorecard - Growth Picks Up
Within the Zacks Industry classification, the metals-ferrous and
non ferrous industry falls under the broader Basic Materials sector
(one of the 16 Zacks sectors). With all the companies in our
coverage under the Basic Material sector having reported their
results, the curtains have fallen on the second-quarter earnings.
Overall, earnings increased 8.6% in the quarter on the back of 3.4%
increase in revenues. Moreover, the Basic Material sector had a
beat ratio (percentage of companies coming out with positive
surprises) of 66.7% in Q2.
There has been a marked improvement from the first quarter of 2014
wherein sector earnings had declined 3.8% while revenues had nudged
up 1.2%. This depicts a better picture compared with what we have
witnessed in the recent quarters. For further details about
earnings for this sector and others, please read our '
Q3 & Beyond - Momentum to Continue
For 2014, earnings at the sector are expected to grow at a rate of
9.3% in the third quarter but decelerate to 6.9% in the fourth
quarter. Overall, in 2014, the sector's earnings are projected to
grow 8.3%. In 2015, the growth will accelerate at a brisk pace to
Industry Ranking & Outlook - Positive on Aluminum and
Copper, Neutral on Iron
Within the Zacks Industry classification, the iron mining and
non-ferrous mining industries are broadly grouped in the Basic
Materials sector (one of 16 Zacks sectors). We rank all of the 260
industries in the 16 Zacks sectors based on the earnings outlook
for the constituent companies in each industry. This ranking is
available in the
Zacks Industry Rank
The way to align the ranking and outlook from the complete list of
Zacks Industry Rank for the 260+ companies is that the outlook for
the top one-third of the list (Zacks Industry Rank of #87 and
lower) is positive, the middle one-third (Zacks Industry Rank
between #88 and #173) is 'Neutral' while the outlook for the bottom
one-third (Zacks Industry Rank #174 and higher) is negative.
The non-ferrous mining industry features in the top 1/3rd with a
Zacks Rank of #56 indicating that the outlook is positive. The iron
mining industry features in the middle tier with a Zacks Industry
Rank #108, indicating a neutral outlook.
Please note that the Zacks Rank for stocks, which are at the core
of our Industry Outlook, has an impressive track record, verified
by outside auditors, to foretell stock prices, particularly over
the short term (1 to 3 months). The rank, along with Expected
Surprise Prediction (ESP) (Read:
Zacks Earnings ESP: A Better Way to Find Earnings
) helps in predicting the probability of earnings surprises.
To Sum Up
At the onset of 2014, the outlook for industrial metals was bleak
as increased supply and insufficient demand exerted a downward
pricing pressure on commodities. But six months into the year, the
situation has changed with once laggards -- aluminum and copper --
showing signs of revival. These base metals prices will improve on
the back of growth in the U.S. and an improving global
macroeconomic scenario, as well as an improved supply and demand
balance. A positive Zacks Rank and projected earnings growth for
2014 instills optimism in the so far faltering non-ferrous mining
On the other hand, a glut in supply and current high inventories
will keep iron prices in check, justifying a neutral outlook for
the iron mining industry. A revival of the Chinese economy and
correction of the supply-demand imbalance will be instrumental in
driving growth in the industry.
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