Industrial Metals Stock Outlook - May 2016

After a nightmarish 2015, this year has so far brought a ray of hope for industrial metals. Last year, prices were hitting multiyear lows due to the economic weakness in China and the interest rate hike. Let's take a closer look at the price movement of a few important metals so far this year and what lies ahead.


Iron ore prices were on an upward trajectory, recently reaching $70 a ton -- its highest since Jan 2015. The surge was triggered as the "big three" producers -- BHP Billiton Limited ( BHP ), Rio Tinto plc ( RIO ) and Vale S.A ( VALE ) -- trimmed their full-year iron production guidance. In addition, the fresh stimulus measures introduced by the Chinese government to boost steel production, which implies a revival in the country's property construction sector, led to the upswing.


The ongoing slump in oil prices continue to take a toll on aluminum prices as the metal belongs to an energy intensive industry. Prices also suffered due to the oversupply of the metal, which was further aggravated by surging aluminum exports from China (the world's biggest producer) amid waning domestic demand.

New York-based aluminum giant Alcoa Inc. ( AA ) saw its profits plunge 75% to 7 cents per share in the first quarter of 2016. The company posted realized aluminum prices of $1,793 per metric ton, reflecting a year-over-year decline of more than 25%. Alcoa trimmed its expectation of global aluminum demand growth to 5% in 2016 from 6%. Russian aluminum giant, RUSAL expects to see demand grow at a healthy 5.7% in 2016 on the back of strong growth in North America, Europe and Asia.

The aluminum price rout has triggered Alcoa's split into two companies - the upstream, raw materials company which will retain the Alcoa name, and the new entity, named Arconic, which will comprise the Global Rolled, Engineered Parts and Transportation & Construction businesses. The transaction is expected to close in the second half of 2016.


Concerns about Chinese economic growth rates, apprehensions surrounding Europe, continued U.S. dollar strength and weakness in commodity prices put pressure on copper prices during 2015. Copper producers Glencore Plc ( GLNCY ) and Freeport-McMoRan Inc. ( FCX ) announced production cut last year amid a weak commodity price environment.

This year, however, prices have been on the rise on the back of strong U.S. economic data and expectations of a stimulus in China and Europe. During the first quarter, LME copper prices ranged from a low of $4,310.50 on Jan 15 to a high $5,103.00 on Mar 18.

After attaining its mid-March highs, copper prices had slumped as news of record stockpiles in China and the possibility of a ramp-up in copper exports by the world's leading consumer surfaced. Again, in April, huge imports to China led to a comeback in the metal's prices. Copper imports surged 36% from the February level to a record 570,000 tons in March and 39% year over year.

This rise provided respite to several major diversified and copper-focused companies -- BHP Billiton, Rio Tinto, Freeport McMoRan and VALE -- after the trying conditions in 2015.

Industry Ranking & Outlook - Positive

Within the Zacks Industry classification, the iron mining and non-ferrous mining industries (aluminum, copper, etc.) are grouped under the Basic Materials sector (one of 16 Zacks sectors). We rank the 257 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 257+ companies is that the outlook for the top one-third of the list (Zacks Industry Rank of #86 and lower) is positive, the middle one-third (Zacks Industry Rank between #87 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 and the iron mining industry feature in the top tier with a Zacks Rank of #35 and #56, respectively, garnering a positive outlook.

Sector Level Earnings Trend

Q1 Earnings Scorecard, Projection for Future Quarters

Only 10% of the companies in the basic materials sector have reported their first-quarter results so far, marking a 34% drop in earnings on the scoreboard. Taking into account all the companies that are yet to report, a 23.7% drop is projected for the first quarter.

While earnings are expected to further decline 14.1% in the second quarter, a dramatic recovery is anticipated in the latter half of the year, with 2.8% growth in the third and 16.8% in the fourth. (For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.)

What's in Store?

Iron: Per the World Steel Association, global apparent steel use will continue on the downward trajectory with a 0.8% dip projected for 2016, while Chinese steel use will decline 4%. On the other hand, its neighbor, India holds promise and will log a 5.4% improvement on the back of low oil prices, the reform momentum, and policies to increase infrastructure and manufacturing output.

In the U.S., while low oil prices and a strong dollar remain dampeners, an improving job market and a strong housing sector will lead to 3.2% growth in steel demand. Major iron producers have announced expectations of production cuts. As obvious, the key to stabilize prices is to maintain the balance between demand and supply.

Aluminum: Aluminum prices will remain under pressure given the oversupply of the metal in the market. However, the automotive, packaging and airline industries are expected to support demand. India appears promising given its currently low levels of aluminum consumption and high urban population growth. With demand being strong, the industry needs to pull the reins on supply, which will lead to deficits for a prolonged period and create the ground for higher aluminum prices, going forward.

Copper: We have a long-term bullish stance on copper, supported by its widespread use in transportation, manufacturing and construction, limited supplies from existing mines, and the absence of new significant development projects.

To Sum Up

The supply glut has to be balanced by production cuts to support prices. A further delay in the rate hike would also help the cause of industrial metals. Moreover, a recovery in the Chinese economy will help revive the industry. Besides that, projection of earnings growth and a positive outlook for the industry instill investor confidence in the otherwise faltering industrial metals space.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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