Here, we discuss some of the key reasons and what investors in the industrial metals sector can look forward to in the coming months and years:
High Hopes on Trump
The industrial metals space has benefited from the Donald Trump election win. His $500 billion infrastructure plan offers opportunities for the industrial metal space. Trump’s promise to revive American infrastructure implies that commodities used to build everything from airports to bridges will benefit under his presidency.
The housing and construction sector is the largest consumer of steel today and, consequently, of iron ore. Building construction (pipes and wires) is also the largest market for copper. An uptrend has been noticed in real estate activity, like new home initiatives and construction spends, in the U.S. over the past few quarters. Long-stalled construction projects are being renewed. Requirement for emerging projects, such as education facilities and government buildings, is also creating demand in the sector.
In the long term, as the urban population increases worldwide, so will the need for steel increase in tandem with the need to build skyscrapers and public transport infrastructure. Emerging economies will also continue to be major demand drivers to support increasing urbanization and industrialization. Naturally, a rebound in construction bodes well for the iron ore and copper industries.
Pickup in Economic Activity to Drive Copper Demand
Copper is a major industrial metal playing a particularly important role in emerging countries. Given its varied applications, the trends in the copper market are often considered useful indicators of the state of the global economy.
Developments in the world economy are strongly correlated with movements in copper prices. Given that China accounts for the largest share of global copper consumption and has a large share in the total production of pure copper, it’s no surprise that there is a strong correlation of the metal with China’s ups and downs in economy.
In the long run, expectations of the growing middle class populace in Asia, particularly in India and China, who will spend more on consumer goods such as air conditioners and refrigerators, will spur demand for copper. Chinese demand for the metal will likely grow to comprise 46% of the worldwide copper consumption by 2018.
Rectifying the Aluminum Demand-Supply Imbalance
After aluminum prices bore the brunt of chronic surplus, the global aluminum industry underwent substantial changes to correct the supply-demand picture. This will eventually lead to firm prices. RUSAL is contemplating further aluminum production cuts totaling approximately 200,000 tons per annum. This came after a reduction of 316,000 tons in 2013, 256,000 tons in 2014 and 38,000 tons in the last quarter of 2015.
Likewise, Arconic has undertaken a number of restructuring measures (including closure of smelters) over the past few years, apart from aggressively pursuing cost-cutting actions. In Mar 2015, management initiated a 12-month review of 500 kmt in smelting capacity for possible curtailment (partial or full), permanent closure or divestiture. This review was part of management’s target to lower Arconic’s smelting operations on the global aluminum cost curve to the 38th percentile (currently 38th) by the end of 2016.
As part of this review, the curtailment of capacity at São Luís and Wenatchee was completed in Apr 2015 and by the end of Dec 2015, respectively. The permanent closure of Warrick was completed by the end of March 2016.
Aluminum is expected to see in a deficit of 1.2 million tons this year due to curtailments in China. Arconic projects record global aluminum demand in 2016 of 60.5 million tons, up 6% over 2015 levels. Global aluminum demand is expected to double between 2010 and 2020. Alumina cuts in China will help deepen the forecast market deficit, with 6.7 million tons of curtailments already announced and set to be completed.
India to Support Demand Going Ahead
As per the World Steel Association, India’s prospects look bright due to consumption-boosting reforms and favorable policies to improve infrastructure and manufacturing output. Also, IMF projects India’s GDP growth to rise to 7.6% this year, above its previous projection of 7.4%, citing the resilience of its economy and robust growth momentum. Given that India's consumption of metals almost doubled over the past 20 years, it will be a major consumer in the years to come.
Bottom Line
As you can see, there is no reason for not being optimistic about the industrial metals industry over the long haul. But what about investing in the space right now?
Some Stocks in the Space Worth Adding
A positive outlook for the industry reinforced by expectations of earnings growth eventually in 2016 makes a good investment case for the industry. Investors can consider the following stocks that are backed by a solid Zacks Rank and estimate revisions.
With positive estimate revisions of around 10.14% over the past month, average earnings surprises of 18.75% in the last four quarters, and robust expected earnings growth of 22.40%, Vale S.A. (NYSE:VALE – Free Report) , can be a solid addition to one’s portfolio. The stock currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Fission Uranium Corp. (OTCMKTS:FCUUF – Free Report) carries a Zacks Rank #2 and its estimates for 2016 have moved up over the past 60 days.
Fortescue Metals Group Ltd. (OTCMKTS:FSUGY – Free Report) , carries a Zacks Rank #2 and has witnessed upward movement in its earnings estimates over the past 30 days.
Kumba Iron Ore Ltd. (OTCMKTS:KIROY – Free Report) also carries a Zacks Rank #2 and its Zacks Consensus Estimate for 2016 has moved up 13.6% over the last 60 days.
FMG Price at posting:
$5.99 Sentiment: Buy Disclosure: Held
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