The Metals & Mining industry encompasses the extraction
(mining) as well as primary and secondary processing of metals and
minerals. The industry is oligarchic in structure, with a few
producers accounting for a lion's share of the output.
Iron and steel commands a major chunk of the global metals market
-- more than half the metals industry in terms of volume, followed
by aluminum. The iron and steel 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.
The precious metal and minerals 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.
The industry is highly cyclical and competitive. Historically, it
has suffered from overcapacity (excess of supply over demand).
Metal producers are subject to cyclical fluctuations in prices,
general economic conditions and end-user markets. The weakening
outlook for global economic growth has emerged as a major headwind
for the global metal industry. These near-term challenges aside,
the group's long-term dynamics appear attractive.
A Detailed Look into Metals: Performance and
As the major stakeholder in the metals market, the steel industry
was severely hurt by the global economic downturn. Recovery,
however, was swift and forceful. According to the World Steel
Association, world crude steel production was a record 1,527 Mt in
2011, a 6.8% annual jump. In the first quarter of the current
fiscal, world crude steel production was 377.3 Mt, and improved
further to 388.4 Mt in the second quarter. Moreover, recent data
shows that crude steel production for July and August was at 252.5
Mt, trending 0.4% higher than the comparable period last year.
China retained its leadership position among the steel producing
countries, yielding almost half of the global output at 48%,
growing 2% year over year so far in the third quarter. Japan, the
second largest producer, posted a 2% increase. The United States
held the third position, producing 14.8 Mt of crude steel, flat
annually and constituted 6% of the total global output. Asia
improved 2.3% to 166.8 Mt, while production in Europe was a
dampener, declining 4.5%.
The automotive and construction markets have historically been the
largest consumers of steel. The automotive sector has shown
significant promise. Auto sales in the U.S. surged 13% to 1.19
million vehicles for the month of September 2012. The seasonally
adjusted annual rate (SAAR) went up 13.7% to 14.9 million vehicles
from September last year, the highest sales rate in the last four
Auto sales for the first nine months of 2012 averaged 14.5 million
SAAR and grew a promising 15%. The robust growth rate in the sector
has been fueled by strong pent-up demand, cheap financing, launch
of several redesigned and fuel-efficient vehicles, rebound in
consumer confidence, thanks to a growing belief that the housing
market is recovering.
The construction sector had been a drag on the steel companies'
earnings. However, recent figures suggest a turnaround in the
non-residential as well as residential construction sector.
According to the American Institute of Architects, the architecture
billings index (ABI), an economic indicator that provides an
approximate nine- to twelve-month glimpse into the future of
non-residential construction spending activity, stood at 48.7, up
considerably from 45.9 registered in June.
Even though in the negative territory (since any score above 50
indicates an increase in billings), the index level pointed toward
a moderation in the downturn. The momentum picked up in August with
ABI climbing back into the positive territory with a score of 50.2
for the first time in five months.
The American Institute of Architects projects a 4.4% increase in
spending this year for non-residential construction projects, on
the back of increase in demand for industrial facilities so far
this year along with sustained demand for hotels and retail
projects. The spending is expected to accelerate further to 6.2% in
As per the U.S. Department of Commerce, housing starts increased
29% to a seasonally adjusted annual rate of 750,000 in August 2012
compared with August 2011. Building permits in August were at a
seasonally adjusted annual rate of 803,000, 24.5% higher than the
year-ago figure. It is worth mentioning that building permits in
July this year had touched the highest level in four years at
In a nutshell, record-low mortgage rates, rising rents and reduced
prices of properties are luring buyers. These figures provide a
glimmer of hope that U.S. residential construction is finally
stabilizing and is on the road to a much awaited recovery.
Reflecting on the second quarter results of the steel companies in
our coverage --
United States Steel Corp.
AK Steel Holding Corporation
) -- we see revenues were constrained due to drop in average steel
prices. This does not come as a surprise, however, as oversupply in
the U.S. steel industry and increased steel imports in the domestic
market affected steel prices, hurting margins and profits of steel
players in the process.
Looking forward to the third quarter, the steelmakers expect
profits to be lower than the second quarter due to continued
increase in steel imports, decline in average realized prices along
with macroeconomic uncertainty and sluggish growth in emerging
For 2012, the World Steel Association provides a muted outlook,
projecting a 3.6% increase in global steel usage, a sharp
deceleration from 5.6% growth in 2011. This reflects a continuing
slowdown in Chinese steel demand and Eurozone debt crisis
uncertainties. Furthermore, questions about the U.S. growth outlook
also loom large.
After recording a 6.2% growth in 2011, China's steel usage in 2012
is estimated to grow 4% to 648.8 Mt as the economy is entering a
less steel-intensive growth phase as a result of the government's
efforts to rebalance the economy and restrain the real estate
bubble. After a weak performance in 2011, India is expected to grow
by 6.9% to 72.5 Mt. Japan's steel usage is expected to drop 0.6% to
63.7 Mt in 2012, due to the impact of exchange rate appreciation
despite the reconstruction activities after the March 2011
In 2013, world steel demand is expected to increase 4.5% to
approximately 1,486 Mt. China's steel usage is expected to grow 4%
to 674.8 Mt from the 2012 projections. India is expected to pick up
pace and grow 9.4%, triggered by urbanization and surging
infrastructure investment. In 2013, the steel use in the U.S. is
envisioned at 99.5 Mt, recording 5.6% growth. Brazil is expected to
grow 6.7% to reach 52.5 Mt in 2013. Japan is expected to decline
further by 2.2% to 62.3 Mt, comprising 77% of the 2007 level.
Europe is, however, expected to record a modest recovery of 3.3% to
155.8 Mt in 2013.
Given the scenario in Europe, ArcelorMittal, the world's largest
steelmaker in terms of volume and Europe's largest steelmaker, had
earlier decided to idle five of its 25 blast furnaces in Europe and
announced the extended idling of a number of facilities. The
company will continue to align its steel growth projects to match
demand situations. To reduce its exposure to Europe, the company
recently sold its 24% share in European energy company, Enovos
Steelmakers are increasing their consolidation efforts,
particularly in China and India, in order to derive economies of
scale and other synergies to remain competitive. A major
development in this sector was the recent merger of Japan's largest
and world's sixth-largest steel maker Nippon Steel Corporation with
27th-ranked Sumitomo Metal Industries to form the world's second
biggest steel firm - Nippon Steel & Sumitomo Metal Corporation
(NSSMY). With a combined capacity of 46.1 million tons, it is set
to replace China's Hebei Group in the second position, which has a
production of 44.4 million tons. The merger is targeted to generate
savings in the face of increasingly intense global competition.
To sum up, despite plagued by overcapacity and softening prices,
the outlook for the sector is not that bad. The outlook for key
end-markets in the automotive, transportation, energy, industrial
and agricultural sectors remains favorable. The faltering
construction sector is showing signs of a turnaround.
China's recent attempt to bolster its economy by approving 60
infrastructure projects worth more than $150 billion will help lift
up the steel sector. Prices could potentially stabilize on the back
of a rebound in construction activity in the developing countries,
in particular China, India and South Korea.
Furthermore, the sector will also benefit from the Federal
Reserve's move to boost the U.S economy. However, the European debt
crisis and its potential global impact remain an overhang on the
As per the World Gold Council, 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.
In the second quarter of fiscal 2012, gold demand was at 990 tons,
down 7% year over year. Increase in demand from central banks was
offset by declines in demand for jewelry, investment and in the
technology sectors, due to higher prices. Central banks continued
to be the primary purchasers of gold, accounting for around 16% of
total gold demand, at 157.5 tons. This was a record quarter for
central bank, buying more than twice the purchases in the second
quarter last year.
In absolute terms, gold demand in the quarter was valued at $51.2
billion, a 1% decline from the second quarter of fiscal 2011.
Average gold price in the first quarter stood at $1,609.49, 7%
above the prior fiscal's quarter.
Investment demand declined 23% to 302 tons, due to lower demand for
ETFs and physical bars, particularly in India and China. Gold
demand in the technology sector was 1,112.2 tons, a 5% decline
year-over-year due to higher gold prices, weak consumer demand,
uncertainty in Europe and substitution to more affordable
Jewelry demand dipped 15% to 418.3 tons due to higher price levels.
Jewelry demand in India, a major consumer of gold, was down 30%,
mainly due to a deprecation in the Indian rupee against the US
dollar, which led to record high local prices. Furthermore, slowing
GDP growth, domestic inflation, high interest rates and below
average monsoon rain also contributed to the decline. Gold in India
is currently at an all-time high in rupee terms.
In China, another major market, demand for gold decreased 9% to
93.8 tons as consumers were discouraged by the slowing GDP growth
and the lack of clear trend in gold price. However, China is
expected to resume its pace as economic growth is expected to pick
up as a result of the monetary easing implemented in the second
Mine production inched up 3 tons to 706.4 tons, up 3% year over
year. Adverse weather conditions, interruptions at few operations
and slower ramp up of production at few mines affected the
production numbers during the quarter. Recycling activity decreased
12% to 363.7 tons, bringing the total supply to 1,059.1 tons, down
6% year over year.
Russia is becoming an important player in the global gold market.
The Central Bank of Russia remains a significant purchaser of gold.
A healthy domestic economy is driving the demand for gold jewelry
in the region, catapulting it to the position of the world's fourth
largest gold jewelry consumer. The region accounts for 8% of the
total global gold output.
Gold prices in 2011 ranged from a low of $1,310 per ounce to a high
of $1,895 per ounce, with an average gold price of $1,572 per ounce
in 2011. 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. So far in 2012, gold has ranged from
$1,540 per ounce to $1,791.75 per ounce, with an average of
$1,656.18 per ounce.
Continuing concerns about Europe's financial problems and China's
reduced economic growth forecast led to the climb. Furthermore, the
announcement of a third round of quantitative easing led to a surge
in the price of gold. Given the performance in 2011, and thus far
in 2012, we expect this year to be stellar for gold.
This climb in gold prices has not translated into increased
revenues at all of the gold miners. In the second quarter, while
Kinross Gold Corporation
Agnico-Eagle Mines Ltd.
) benefited from higher average realized price of gold,
Barrick Gold Corporation
Newmont Mining Corp.
) could not capitalize from them due to increased cash costs.
Moreover, Goldcorp was riddled with production issues at its Red
As prices for gold rise further, gold giants such as Barrick Gold
and Goldcorp being unhedged producers of gold will enjoy
significant leverage to gold prices. The cost increases need to be
controlled in order to rake in profits. On the other hand, gold
producers like Newmont and Kinross are slated to suffer from lower
ore grades that subdue production levels, increase mining costs and
negate the benefits of rising gold prices.
Ironically, rallying gold prices have not had the same effect on
the share prices of the gold companies. Investors prefer
alternative financial products that allow them to invest in gold,
rather than investment in gold companies per se. These companies
may be entangled in labor issues, escalating cost and other risks.
Gold remains a coveted asset, given its long-term supply and demand
dynamics and influenced by macro-economic factors. The value and
wealth preservation attributes of gold continue to attract
investors and consumers, and is considered a safe-haven investment.
Concerns regarding economic growth in developed countries have made
gold an attractive and safe investment option.
The European sovereign debt crisis promoted gold as a currency
hedge for European investors.
Lingering economic concerns, higher inflation expectations in many
countries, including India and China, and the relentless Euro-zone
debt crisis will continue to drive gold prices this year, as well.
India, which alone consumes nearly 45%−50% of the world's gold,
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.
The aluminum industry is highly cyclical, with prices subject to
worldwide supply and demand.
), the world leader in the production of primary aluminum, kicked
off the third quarter earnings season with a revenue decline of 9%
due to a 17% and 20% year-over-year decline in the realized metal
price and realized alumina price, respectively. On an adjusted
basis, the company reported earnings per share of 3 cents compared
with 6 cents per share earned in the second quarter.
Results were down sequentially due to lower metal prices, seasonal
factors and weakness in Europe. Alcoa's results in the past two
quarters have suffered because of the decline in realized aluminum
The company has trimmed its 2012 outlook expecting global aluminum
demand to go up by 6% this year from the earlier expectation of 7%,
due to the slowdown in China. Alcoa believes that the long-term
prospects for aluminum remain bright and envisions that global
demand for aluminum will double by 2020.
Alcoa's positive long-term outlook notwithstanding, prices have
been under pressure, prompting companies to cut back on production.
Rio Tinto plc
) plans to sell its aluminium assets and close its smelter in order
to cut costs. In line with this, Rio recently sold its U.S.-based
wire and cable business Alcan Cable for $185 million.
BHP Billiton Limited
) is also mulling the sale of its aluminum and nickel operations to
exit from its non-profitable projects.
Alcoa is aggressively slashing costs and pursuing strategies to
move down its cost curves in its upstream businesses. The company
remains committed to achieving its target of moving down the cost
curve 10 percentage points in smelting and 7 percentage points in
refining by 2015. The company is curtailing 390,000 metric tons of
its system smelting capacity to improve its competitive position.
Alcoa permanently closed its smelter at Alcoa, Tennessee, and two
lines at Rockdale, Texas. Alcoa has completed partial curtailments
at La Coruña and Avilés, Spain. The curtailment at its Portovesme,
Italy smelter is underway.
This trend will continue until aluminum prices recover. Energy
prices and other input costs are expected to pose challenges for
the aluminum industry, though oil prices have been trending down
lately. In addition to the curtailments, the company will step up
activities to reduce the escalating cost of raw materials.
In the medium to long term, aluminum consumption is expected to
improve globally. The revival is palpable in the automotive and
packaging industries, one of the key consumer markets. The
automobile market is also becoming increasingly aluminum-intensive,
benefiting from the recyclability and its light-weight properties.
The global push to improve fuel efficiency in vehicles is expected
to more than double demand for aluminum in the auto industry by
Further, the surge in copper prices observed earlier this year is
triggering a switch among manufacturers to aluminum. Automobiles,
air conditioners and industrial components manufacturers are now
shifting their focus on more economical metal. In response to the
spurt in automotive demand, Alcoa has invested $300 million in
expansion projects at its Davenport, Iowa rolled products plant.
We expect aluminum demand to increase over the next three years,
outstripping supply growth. As a result, the aluminum market is
likely to witness deficits for a prolonged period. This provides a
backdrop supportive of high alumina and aluminum prices. China and
India are undergoing rapid industrialization.
The China stimulus plan and QE3 announcement will also work as
positives for underlying aluminum demand. Leading aluminum
producers such as Alcoa and
Aluminum Corporation of China Limited
) should also benefit from the improving demand outlook.
Copper is a major industrial metal, with its price strongly
correlated with the outlook for economic growth. The metal's strong
cyclical leverage accounts for its nickname "Dr. Copper."
The metal's popularity in industrial usage reflects its high
ductility, malleability and thermal and electrical conductivity,
and its resistance to corrosion. In terms of consumption, copper
holds the third place after iron and aluminum. Construction is the
single largest market for copper, followed by electronics and
electronic products, transportation, industrial machinery, and
consumer and general products.
Copper prices were at high levels from 2006 through most of 2008 as
limited supplies, growing demand from China and other emerging
economies led to the surge in copper prices and low level of
inventories. 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, thanks to strong demand
from emerging markets and limited supply. In 2011, London Metal
Exchange (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.
In the first quarter of 2012, LME spot copper prices ranged from
$3.39 per pound to $3.93 per pound, averaging $3.77.
However, during the second quarter of 2012, LME spot copper prices
declined ranging from $3.29 per pound to $3.89 per pound, averaging
$3.57 per pound. This drop reflected concerns regarding a slowdown
in the Chinese economy, Europe's sovereign debt crisis, and a
slowing U.S. economy. The drop in price has affected the results of
copper producers like
Freeport-McMoRan Copper & Gold Inc.
Southern Copper Corp.
) and Newmont.
Notwithstanding the current volatility in prices, we have a
long-term bullish stance on copper. Prices will be influenced by
demand from China and emerging markets, 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.
Despite the near-term challenges, the long-term outlook for the
copper remains positive, supported by its widespread use, 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.
Overall Industry Outlook
Growth in emerging markets, particularly China and India, was a
major driver of metals demand over the last few years. However, of
late, demand in China has slowed down as the government cut its
2012 target growth rate to 7.5%, the lowest year-on-year growth
projection in eight years. China's recent $150 billion
infrastructure has helped improve sentiment and holds promise for
the metals and mining industry.
In the developed world, persistent recessionary conditions in
Europe will have residual effects elsewhere. The U.S. economy,
which looked very promising earlier this year, no longer offers a
robust picture. The U.S. Federal Reserve also appears to be
actively engaged in sustaining the economy's momentum and its
recent announcement of another round of quantitative easing, will
hopefully jumpstart growth once again.
This synchronized global economic slowdown is the biggest headwind
for the metals space overall at present. That said, the long-term
picture remains a lot more promising as the emerging market
economies are expected to get back in shape with the help of
expected fiscal and monetary stimuli.
ALCOA INC (AA): Free Stock Analysis Report
BARRICK GOLD CP (ABX): Free Stock Analysis
ALUMINUM CP-ADR (ACH): Free Stock Analysis
AGNICO EAGLE (AEM): Free Stock Analysis Report
AK STEEL HLDG (AKS): Free Stock Analysis Report
FREEPT MC COP-B (FCX): Free Stock Analysis
GOLDCORP INC (GG): Free Stock Analysis Report
KINROSS GOLD (KGC): Free Stock Analysis Report
ARCELOR MITTAL (MT): Free Stock Analysis Report
NEWMONT MINING (NEM): Free Stock Analysis
NUCOR CORP (NUE): Free Stock Analysis Report
SOUTHERN COPPER (SCCO): Free Stock Analysis
UTD STATES STL (X): Free Stock Analysis Report
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