The rise in global population, growth in the Chinese economy,
urbanization of the Asian countries and increasing requirements of
the developed countries have created an unprecedented demand for
minerals and metals. The metals & mining industry caters to
this ever-rising demand through extraction (mining) and primary and
secondary processing of these metals. However, of late, the tepid
global economic growth and a slowdown in the Chinese economy have
emerged as a major headwind for the global metal industry.
Mining - Ferrous: Iron
Iron Ore Price Trends
Iron ore prices had a bullish run in 2013, in contrast to other
base metals, helped by heightened demand from steel end consumers,
particularly the Chinese construction sector. The scenario changed
dramatically in the first quarter of 2014, with iron ore prices
recording its sharpest one-day drop in four years in March tumbling
by 8.3% to close at $104.7 per ton. This represented an 18-month
low for iron ore prices.
Overall, prices have been impacted by myriad reasons ? rising
production and abundant supply of iron, tight credit in China and
persistent fears regarding China's economy. Global steel production
rose by a meager 2.5%, mainly dragged down by a slowdown in China's
output and affecting demand for iron ore, its main ingredient.
Falling iron ore prices have reflected upon first-quarter results.
) reported a 19% plunge in its first-quarter profit due to the fall
in prices of iron ore, its main product.
Since the first quarter, iron ore prices had recovered somewhat to
move up as high as $119.40 a ton on Apr 10, but have again dipped.
In April, price of the steelmaking raw material overall dipped 8%.
Iron prices have gone downhill due to slow economic growth in China
and the government's disapproval of the practice of using iron ore
as collateral in lending transactions.
Iron Industry: Outlook
There is a threat of oversupply in 2014 as major iron ore
Rio Tinto plc
BHP Billiton Ltd.
Fortescue Metals Group Ltd.
) 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 continue to increase its shipments.
Even though iron ore exports from India have lessened
significantly in the last two years as the court imposed a ban on
mining, an improvement in export shipments is expected this year.
Brazil will also hike its exports. In case this excess supply is
not matched by adequate demand, it will expose the market to the
risk of a further decline in prices.
Per the World Steel Association, global steel production is
expected to increase 3.1% in 2014, less than half of last year's
rate and the slowest pace in at least 15 years. After it soared
6.1% in 2013 aided by support from government infrastructure
investment, apparent steel use in China is expected to slow to 3%
growth in 2014 as the Chinese government's efforts to rebalance the
economy continues to restrain investment activities.
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.
Mining - Non-Ferrous: Aluminium
In 2013, aluminium prices slid and 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). Realized aluminum prices
declined 8% year over year in the first quarter of 2014. Supply
outpacing demand led to the dismal performance, which was
aggravated by rising inventories. Industry results suffered because
of the decline in realized aluminum prices.
Aluminium Industry: Outlook
After aluminum prices bearing the brunt of chronic surplus, the
global aluminium industry is going through a substantial change.
Companies have decided to cut back on production. Rusal, the
world's largest aluminum producer, reduced production by 9% in 2013
compared with 2012. Rusal has effectively attained almost a 3-year
low cash cost within the aluminium segment.
) has taken up a number of restructuring measures (including
closure of smelters), and is aggressively pursuing cost-cutting
actions. Alcoa, during the first quarter, announced three smelting
capacity reductions. Once all announced curtailments and closures
are executed, Alcoa will have reduced its operating smelting
capacity 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 market. 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.
Following China, which accounts for over 40% of the global aluminum
consumption, India appears promising as its current low level of
aluminum consumption and high urban population growth make a
favorable combination. 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.
Mining - Non-Ferrous: Copper
Movement in Copper Price & Performance
For the most part of 2013, oversupply and lack of demand kept
in check. LME spot copper prices averaged $3.19 per pound during
first-quarter 2014. Lower prices hurt results of copper producers
Freeport-McMoRan Copper & Gold Inc.
Southern Copper Corp.
Newmont Mining Corp.
). Demand from key end markets, like construction materials and
electronics, remained weak due to the overall economic softness.
Weakness in the Chinese economy led to decline in copper demand as
it accounts for about 40% of the world's annual copper demand.
In the wake of the decline in metal prices, copper companies have
reduced their budgeted future capital expenditures, exploration and
other costs and are looking to rid themselves of some of their
saleable assets. In 2013, Freeport diversified from its
bread-and-butter copper mining business by venturing into the U.S.
energy space with the acquisition of Plains Exploration &
Production Company and McMoRan Exploration Co. The merger positions
the combined entity as a leading natural resource conglomerate in
Copper Industry: Outlook
The scenario in 2014 will be similar to 2013 with demand and supply
imbalances. 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. Prices will be
influenced by demand from China and emerging markets, economic
activity in the U.S. and other industrialized countries.
Overall Industry Ranking
Within the Zacks Industry classification, the Iron Mining and
Non-Ferrous Mining industries are broadly grouped in the Basic
Materials sector (one of the 16 Zacks sectors). We rank all of 258
industries in the 16 Zacks sectors based on the earnings outlook
for the constituent companies in each industry. This ranking is
available on the
Zacks Industry Rank page
The way to align the ranking and outlook from the complete list of
Zacks Industry Rank for the 258+ industries is that the outlook for
the top one-third of the list (Zacks Industry Rank of #86 and
lower) is positive, while the outlook for the bottom one-third
(Zacks Industry Rank #172 and higher) is negative.
The Iron Mining industry features in the top 1/3rd with its Zacks
Industry Rank #63 indicating a positive outlook, while the
Non-Ferrous Mining industry features in the middle tier at Zacks
Industry Rank with a Zacks Rank of #91 indicating that the outlook
is on the neutral side. One could say that the near-term outlook
for the group as a whole depicts 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 the Expected
Surprise Prediction (ESP) (Read:
Zacks Earnings ESP: A Better Way to Find Earnings
) helps in predicting the probability of earnings surprises.
Sector Level Scorecard in Q1
As we have crossed the halfway mark in the Q1 earnings season, for
the 77.3% of the companies in the Basic Material Sector that have
reported, earnings increased 1.2% in the first quarter of 2014, a
much weaker performance than the 29.3% rise in earnings witnessed
in the fourth quarter of 2013. Taking into account all the
companies in the Basic Material sector that are yet to announce
their results, earnings is expected to dip 2.2%.
The expected earnings dip should not make investors shy away from
the Basic Material sector as the feebleness in the first quarter is
broad-based and not concentrated in any one sector. Of the 16 Zacks
sectors, 5 are expected to experience a year-over-year earnings
Q2 & Beyond: What Zacks Predicts
In the second quarter of 2014, earnings of the Basic Material
sector is expected to recover and grow 11.6% and accelerate further
to 14.6% in the third quarter. In the fourth quarter, earnings
growth is expected to decelerate to 6.1%. Overall in fiscal 2014,
earnings are expected to grow 10% and thereafter at 18.2% in 2015.
Overall Industry Outlook
Overall in the metals market, increased supply and insufficient
demand exerted a downward pricing pressure on commodities and this
trend is expected to continue over the short term. Additionally,
cost inflation is expected to be a headwind for metal and mining
companies over the next several years, driven by a number of
factors: labor, energy, ore grades, currencies, supply constraints
and taxes. Global economic uncertainties, softening commodity
prices and higher input costs are increasing the pressure on
To combat this, mining and metals companies are reviewing their
portfolios to identify underperforming assets and to shut down or
divest these high-cost and non-core assets. Industry consolidation,
automation technology, owner-operated mines and investment in
energy assets are some of the steps that these companies are taking
to mitigate the impact of rising costs.
Growth in the U.S. and an improving global macroeconomic scenario
in tandem will boost demand in the industry. Revival of the Chinese
economy will be instrumental in driving growth in the industry.
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