About the Industry
ALCOA INC (
The Metals & Mining industry encompasses the extraction
(mining) as well as the primary and secondary processing of metals
and minerals such as aluminum, gold, precious metals, coal and
steel. The industry is oligarchic in structure, with a few
producers accounting for the lion's share of the output.
The largest segment of the global metals market is iron and steel,
followed by aluminum. The iron and steel segment comprises more
than half the industry in terms of volume. This industry includes
metal ore exploration and mining services, as well as iron and
steel foundries for smelting, rolling, forging, spinning,
recycling, stamping, polishing and plating of iron and steel
products such as pipes, tubes, wire, spring, rolls and bars.
The precious metal and mineral industry consists of companies
engaged in the extraction and primary processing of gold, silver,
platinum, diamond, semi-precious stones, uranium and other rare
minerals and ores, along with the cultivation of pearls.
Overall Industry Outlook
The global metal industry is cyclical, highly competitive and has
historically been characterized by overcapacity (excess of supply
over demand). Metal producers are subject to cyclical fluctuations
in London Metal Exchange (LME) prices, general economic conditions
and end-use markets.
Profitability at the individual company level depends on volume and
operating efficiency. Large producers with huge resources are able
to discover and develop new deposits, thereby boosting reserves,
while the smaller ones own fewer mines.
Mergers and acquisitions (M&A) have historically been a
critically important growth strategy for mining companies. The year
2009 experienced a lull in M&A activity under the impact of the
global economic downturn and the focus shifted from business growth
to business survival, as companies looked to safeguard their
teetering balance sheets rather than seeking expansion.
However, reversing the trend, 2010 witnessed a surge in mining
deals as the rise in commodity prices, economic recovery, demand in
developing markets, growing scarcity of resources and refreshed
balance sheets spurred merger activity.
2011 was a busy year in terms of M&A activity despite the
European debt crisis, earthquake in Japan, social unrest in the
Middle East, and downgrade of the U.S. government's debt rating. We
expect the momentum in M&A to sustain in 2012 as well. Armed
with healthy balance sheets, reduced economic uncertainty and a
pent-up demand for new projects, we expect the companies in the
industry to accelerate deal activity with a re-focus on
In an industry plagued with rising energy and raw material costs,
increasing productivity and reducing costs are the keys to success.
Given the cyclical nature of the metals industry, low-volume,
high-cost producers need to generate sufficient cash or ensure a
strong borrowing position during market peaks to survive the market
Continuing consolidation supports the sector's ability to influence
the price of input costs and companies can also obtain synergies
and economies of scale through the operation of vertically
integrated raw materials sources. Expansion in low-cost countries
will ensure lower labor costs and also help tap their growth
The Glencore-Xstrata merger currently in the offing is one of the
biggest ever in the mining sector. If it materializes, it would
result in a combined new business of $90 billion and will be the
world's biggest exporter of coal for power plants and the largest
producer of zinc. This will be the largest mining transaction in
history, dwarfing the earlier major deals like Rio Tinto-Alcan in
2007 and Vale-Inco in 2006.
Demand in the metals and mining industry has benefitted from the
strong growth in emerging markets. China and India in particular,
are witnessing higher production and consumption of metals. Per
capita consumption levels in both these countries are calibrating
to U.S levels, which could, theoretically at least, double metal
demand in the longer term.
China is the world's largest consumer of metals and is expected to
remain so in the future. Overall, we expect global metal demand to
improve in the long term with the recovery of user industries.
Demand as well as production for industrial metals in Japan had
been recently affected, as factories were shut down in the
aftermath of the country's strongest earthquake and tsunami. Japan
is the biggest buyer of aluminum and the second largest buyer of
We believe the industry will continue to benefit from the metal
demand generated from the country's rebuilding activity. Sovereign
debt issues and sluggish growth in Europe however remain lingering
A Detailed Look into Metals
As the major shareholder (about 60%) of the metals market, the
steel industry was severely bruised by the global economic
downturn. But the recovery has been swift and forceful. According
to the World Steel Association, world crude steel production was a
record 1,527 million tons (Mt) in 2011, outperforming the 2010
record of 1,414 Mt, a 6.8% jump.
China continues to retain its status as the largest steel producing
country, yielding almost half of the global output at 46%, and
growing 8.9% year over year. Japan, the second largest producer
country, however posted a 1.8% decline due to the earthquake.
The United States remained in the third position, producing 86.2 Mt
of crude steel, 7.1% higher than 2010 and comprising 6% of the
total global output.
North America's crude steel production was 118.9 Mt, an increase of
6.8% on 2010. In Asia, overall growth was noted at 7.9% and
Europe rose 4.6%. As per January figures, in the current fiscal,
world crude steel production was 117 Mt, a 7.8% dip from January
2011 but flat with December 2011 levels.
Reflecting on the 2011 results of the steel companies in our
AK Steel Holding Corporation
) -- revenues increased across the board due to higher average
steel prices and increase in shipments.
ArcelorMittal, the world's largest steel producing company,
produced 91.9 million tons in fiscal 2011, representing 6% of the
world's steel output. ArcelorMittal's 2011 sales increased 10% to
$94 billion and for AK Steel sales climbed 8% to $6.5 billion.
Nucor recorded sales increase of 21% to reach $20 billion.
In terms of profitability, Nucor stood tall with its fiscal 2011
EPS of $2.45, almost six fold the 42 cents earned in 2010.
ArcelorMittal's EPS in fiscal 2011 plummeted 31% to $1.19. AK Steel
reversed its year-ago loss to earn 9 cents (excluding special
items) in 2011.
U.S. Steel Corp
), though still in red, narrowed its fiscal 2011 loss per share to
47 cents from the year-ago loss of $3.36.
Currently, Nucor, United Steel and AK Steel retain a Zacks #3 Rank
(Hold) for the short term (1 to 3 months) that corresponds with our
Neutral recommendations in the long term. ArcelorMittal retains a
Zacks #4 Rank (Sell) and we have recently downgraded our long-term
recommendation from Neutral to Underperform.
The steel industry had been severely affected by the global
economic crisis. However, there were signs of a turnaround from the
second half of 2009 which continued into 2010 and 2011 at tandem
with global economic activity. Demand for steel products
nonetheless remains below pre-recession levels. We expect the
recovery to be slow and steady in 2012.
The steel companies expect volumes to improve in 2012 on recovering
demand from improving end-markets, backed by a recuperating global
economy. They expect operating results to significantly improve
from 2011 levels mainly driven by improved average realized prices
and higher shipments. Steel consumption is expected to grow in the
automotive, transportation, energy, industrial, and the
The automotive and construction markets have historically been the
largest consumers of steel. The automotive sector is showing
significant promise. In February 2012, total motor vehicle sales
reached the highest level since February 2008 at 15.1 million SAAR
(Seasonally Adjusted Annual Rate). For the first two months of
2012, sales have averaged 14.6 million SAAR, outperforming the
The construction sector has been a drag on the steel companies'
earnings. However, we see some early signs of recovery in
According to the American Institute of Architects, the architecture
billings index, an economic indicator that provides an
approximately nine to twelve month glimpse into the future of
non-residential construction spending activity, was 50.9 in January
2012. The index has remained over 50 for the third consecutive
month, a sure indicator of an overall rise in demand.
The optimism is seen across most regions of the country and the
major construction sectors. However, given the continued
uncertainty in the market, we expect soft to very moderate
near-term growth in demand in this sector.
According to the data released by the U.S. Department of Housing
and Urban Development, housing starts increased 1.5% to a
seasonally adjusted annual rate of 699,000 in January 2012 from
December 2011 and 9.9% above January 2011.
Building permits in January were at a seasonally adjusted annual
rate of 676,000, 0.7% above the December figure of 671,000 and 19%
above the January 2011 number. These figures provide a glimmer of
hope that U.S. residential construction is finally on a road to
Based on expected economic growth from developing countries like
China, India and South Korea, steel prices will be pushed up higher
in the future. However, the European debt crisis and its potential
global impact remain an overhang on the steel industry.
Given the scenario in Europe, ArcelorMittal has idled 5 of its 25
blast furnaces in Europe. The company will continue to align its
steel growth projects to match demand situations. Furthermore, the
company's focus on its mining business given its more attractive
returns has resulted in some planned steel investments being
As per the World Gold Council reports, 2011 was a milestone year
for gold as global demand for the yellow metal grew 0.4% to 4,067.1
tons at an estimated value of $205.5 billion -- the highest tonnage
level with a value exceeding $200 billion since 1997. The increase
was mainly propelled by the investment sector, particularly in
India, China and Europe.
Mine production increased 4% year over year to a record level of
2809.5 tons. However, there was a decline noted in recycling
activity as consumers held on to their gold in the expectation of
even higher prices. Central banks purchases rose significantly to
440 tons from 77 tons in the prior year reflecting the need to
diversify assets, reduce reliance on one or two foreign currencies
and rebalance reserves. Central banks have been net buyers for
three straight years, the longest stretch since 1973.
Demand for gold bars and coins were robust due to the concerns
raging in Europe, inflation in some countries and the
unsatisfactory performance of a range of alternative instruments.
The ongoing crisis in Europe has positively affected the demand for
gold given the need for asset protection.
Jewelry demand was particularly strong in the first half of 2011
driven by the two major markets, China and India, due to the timing
of local festivals. China and India remain the major consumers of
gold, generating 55% of global jewelry demand and 49% of global
demand. However, record prices in September combined with price
volatility deviated customers towards other investment products.
On the whole, a 28% increase in average annual price led to an
annual decline of 3% in tonnage demand in fiscal 2011.
Notwithstanding this, annual demand was a record $99.2 billion.
Gold demand in the technology sector was at 463.5 tons worth $23.4
billion, a 28% increase year over year. Particular strength was
noted in automotive electronics, industrial electronics and
wireless equipment segments. However, the memory sector weakened
considerably and is expected to remain so in 2012 as well. Severe
flooding in Thailand which affected hard disk drive shipments,
ongoing turmoil in Europe, and shift toward other non-precious
metals also contributed to the weakness.
Gold prices in 2011 ranged from a low of $1,310 per ounce to a high
of $1,895 per ounce. The record gold price of $1,895 per ounce was
attained in September, 33% higher than the 2010 peak of $1,421 per
ounce recorded in November 2010. Average gold price was $1,572 per
ounce in 2011 compared with the prior year average of $1,223 per
So far in 2012, gold has ranged from $1,598 per ounce to $1,781 per
ounce, with an average of $1,698 per ounce. Continuing concerns
about Europe's financial problems and China's reduced economic
growth forecast led to the climb. Given the performance in 2011,
and thus far in 2012, we expect his year to be stellar for the
Gold remains a coveted asset given its long-term supply and demand
dynamics and influenced by macro-economic factors. Concerns
regarding economic growth in developed countries made gold an
attractive and safe investment option. The European sovereign debt
crisis made European investors use gold as a currency hedge.
Pressure on the US dollar against various currencies coupled with
higher inflation expectations in many countries, including India
and China, pushed up gold prices.
The value and wealth preservation attributes of gold continue to
attract investors and consumers. Jewelry and investment demand in
non-western markets continues to rebound while industrial demand
has started to recover in response to an improvement in economic
conditions. India, which alone consumes nearly 45%−50% of the world
gold production, should drive demand for gold along with China.
China will likely emerge as the largest gold market in the world in
2012 and Chinese gold demand is expected to double in 10 years.
Higher prices bode well for gold producers, which should benefit
giants such as
Barrick Gold Corporation
). However, gold producers like
Kinross Gold Corporation
) suffer from lower ore grades that subdue production levels,
increase mining costs and negate the benefits of rising gold
Ironically, rallying gold prices are not having the same effect on
the share prices of the gold companies. This is reflected in our
overall long-term neutral view on the space. Investors prefer
alternative financial products that allow them to invest in gold
rather than investing in gold companies per se that are grappling
with labor issues, escalating cost and other risks.
As the major economies continue to recover, investor confidence in
the stock markets will be restored, causing gold prices to fall. In
reality this is not going to happen anytime soon. The stocks of
Barrick Gold, Newmont Mining, Goldcorp and Kinross Gold Corporation
retain a Zacks #3 Rank (Hold). However, Agnico Eagle holds a Zacks
#5 Rank (Strong Sell).
The aluminum industry is highly cyclical, with prices subject to
worldwide supply and demand forces along with other influences. The
global economic downturn had a drastically negative impact on the
aluminum industry, leading to an unprecedented decline in LME-based
aluminum prices, weak end markets, fall in demand, increased global
inventories, and higher costs of borrowing and diminished credit
availability. The sector has however recovered from recessionary
), the world leader in the production and management of primary
aluminum, in response to the global economic downturn implemented a
number of operational and financial actions to improve its cost
structure and liquidity, including curtailing production, halting
non-critical capital expenditures, accelerating new sourcing
strategies for raw materials, divesting non-core assets, reducing
global headcount, suspending its share repurchase program, reducing
its quarterly common stock dividend and resorting to other
For fiscal 2011, Alcoa reported adjusted earnings of 72 cents per
share, reversing the year-ago loss of 3 cents per share. The
company anticipates that global aluminum demand will go up 7% and
burgeoning demand for aluminum along with market-related production
cutbacks will lead to a global aluminum industry deficit of 600,000
metric tons in 2012.
Aluminium demand started on a strong note in 2011 but weakened in
the second half. Overall, aluminium demand grew 10% in the year
after 13% growth witnessed in 2010. Overall, Alcoa believes that
the long-term prospects for aluminum remain bright and envisions
that global demand for aluminum will double by 2020.
Market conditions for aluminum products are expected to improve
globally, particularly in aerospace (10-11%), driven by rising
demand for large commercial aircraft. The strong performance at the
automotive sector in the fourth quarter is expected to sustain in
2012, growing at en estimated clip of 3-5%. Commercial
transportation is expected to grow 2-5%, packaging in the range of
2-3% and building and construction markets in the band of 4-5%.
Region-wise, in 2012, China is expected to lead the pack with a
growth of 12% followed shortly by India with a 10% rise. Asia
(excluding China) is expected to record a growth of 9% and North
America 3%. Russia and Brazil are expected to increase 4% and 3%,
respectively. Europe, besieged by sovereign debt problems, is
expected to remain flat year over year.
Since the sudden decline from peak prices in mid-2008, aluminum
prices have subsequently increased. In 2010, global aluminum prices
rose 13%. However, in the fourth quarter of fiscal 2011, aluminum
prices plunged 27% from peak levels in April 2011. This was
perpetrated by market concerns that the eurozone debt crisis could
affect the global manufacturing industry and would lead to a huge
downside in metals demand.
Consequently, profits for the mining companies took a blow
compelling them to cut back on production. Rio Tinto announced
plans to sell its aluminium assets and close its smelter in order
to cut costs.
Alcoa plans to close or curtail 531,000 metric tons, or
approximately 12% of its global smelting capacity, in the first
half of 2012. This will lower the company's cost position by 10
percentage points and improve its competitiveness. Energy prices
and other input costs are expected to pose challenges for the
aluminum industry. In addition to the curtailments, the company
will step up actions to reduce the escalating cost of raw
In the medium to long term, aluminum consumption will improve
globally with revival palpable in the automotive and packaging
industries, one of the key consumer markets. Aluminum is widely
used for packaging, beverage cans, food containers and foil
The automobile market is also becoming increasingly aluminum
intensive, benefiting from the recyclability and the light weight
of the metal. Further, the surge in copper price this year is
triggering a switch among manufacturers to aluminum. Automobiles,
air conditioners and industrial components manufacturers are now
shifting their focus on the more economical aluminum.
We expect aluminum demand to increase over the next three years,
outstripping supply growth. As a result, the aluminum market is
likely to see deficits for a prolonged period. This provides a
backdrop supportive of high alumina and aluminum prices. China and
India are undergoing rapid industrialization.
Both these factors are positive for underlying aluminum demand.
Leading aluminum producers such as Alcoa and
Aluminum Corporation of China
) should benefit from the improving demand outlook.
Currently, both Alcoa and Aluminum Corporation of China hold a
Zacks #3 Rank (Hold) supported by our long-term Neutral
Copper has become a major industrial metal given its properties of
high ductility, malleability, and thermal and electrical
conductivity, and its resistance to corrosion. In terms of
consumption, it ranks third after iron and aluminum. Construction
is the single largest market, followed by electronics and
electronic products, transportation, industrial machinery, and
consumer and general products.
Copper is an internationally traded commodity, and its prices are
determined by the major metals exchanges - the London Metal
Exchange (LME), New York Mercantile Exchange (COMEX) and Shanghai
Futures Exchange (SHFE). Prices on these exchanges reflect the
global balance of copper supply and demand, which can be volatile
Copper prices were at high levels from 2006 through most of 2008 as
limited supplies, combined with growing demand from China and other
emerging economies, resulted in high copper prices and low levels
In December 2008 copper prices dipped to a low of $1.26 per pound
due to reduced consumption, turbulence in the U.S. financial
markets and concerns about the global economy. However, copper
prices have since improved from the 2008 lows, thanks to strong
demand from emerging markets and limited supply.
During the past three years, copper prices have fluctuated with LME
spot copper prices ranging from $1.38 to $4.60 per pound. During
2011, LME spot copper prices ranged from $3.08 per pound to a
record high of $4.60 per pound, with an average of $4.00 per pound.
This rising trend has benefited copper producers like
Freeport-McMoRan Copper & Gold Inc.
Southern Copper Corporation
Not denying volatility in prices, which would always be there, we
have a bullish stance on copper prices, long term. Prices will be
influenced by demand from China, economic activity in the U.S. and
other industrialized countries, the timing of new supplies of
copper and production levels of mines and copper smelters.
The outlook for the copper business remains positive, supported by
widespread use of copper, limited supplies from existing mines and
the absence of significant new development projects. Companies that
have a high leverage to copper prices will benefit immensely from
the potential demand for the metal in the developing markets.
Freeport and Southern Copper retain a Zacks #3 Rank in agreement
with our Neutral recommendation on the shares.
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