The Metals & Mining Industry encompasses the extraction (mining), as well as the primary and secondary processing, of metals and minerals. The industry is rather concentrated in structure, with a few producers accounting for the lion’s share of sales.
Geographically, the Asia-Pacific region is witnessing higher production and consumption of metals, especially China and India. This is due to the per capita consumption in these two counties approaching the U.S./European levels, which could − theoretically at least − double metal demand in the longer term.
Historically, the automotive and construction markets have been the largest drivers of metal consumption, more than 50% of the total demand. Other metal consuming industries include energy, electrical equipment, agricultural, domestic and commercial equipment and industrial machinery. Large automakers such as General Motors, Ford Motor Company (F), Toyota Motor Corporation (TM) and Honda Motor Company (HMC) are big consumers of metals including steel and aluminum.
The steel industry, with companies engaged in the extraction of iron ore and coke coal for the processing of iron and steel, is a case in point. This industry includes metal ore exploration and mining services, 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. ArcelorMittal (MT) is the world’s largest steel company with production of 103.3 million tons in 2008.
The precious metals and minerals industry consists of companies engaged in the extraction and primary processing of gold, silver, platinum, diamond, semiprecious stones, uranium and other rare minerals and ores, along with the cultivation of pearls. The gold industry is dominated by Anglo American Plc., the largest gold producer by market capitalization. Demand for gold has been improving sequentially; however, it is significantly lower year over year, distorted by the exceptionally strong demand in 2008.
The outlook for jewelry demand continues to remain weak. While the US economy has shown tentative signs of a recovery, a high degree of uncertainty continues to dampen any improvement in discretionary spending. Total supply of gold worldwide contracted slightly in the last three months of 2009. The key factors weighing on the supply were an increase in producer de-hedging and a negative contribution from the official sector, in addition to lower levels of scrap than previous quarters.
OPPORTUNITIES
We expect the global metal demand to improve in the long term with the recovery of the user industries. China is expected to remain the largest consumer of metals in the coming years. Despite the current slowdown in consolidation within the global metal industry, mergers and acquisitions (M&A) activity remains a critically important growth strategy for companies. While the economic downturn is a significant factor in short-term decisions regarding M&A activity, mining companies expect to make acquisitions over the next three years.
There has been an upward movement in copper prices in recent months, primarily due to stockpiling in China. Market conditions are expected to be favorable for copper in the next couple of years due to higher consumption of the metal in the developing nations. Companies like Freeport-McMoRan Copper & Gold Inc. (FCX - Analyst Report) which have a high leverage to copper prices will benefit immensely from the potential demand for copper in the developing markets.
We also expect aluminum demand to increase over the next three years, outstripping supply growth. As a result, the aluminum market is likely to see deficit for a prolonged period. This provides a backdrop supportive of high alumina and aluminum prices. Leading aluminum producers such as Alcoa Inc. (AA - Analyst Report) should benefit from the improving outlook for aluminum and alumina prices.
The World Steel Association is forecasting an 8.6% year-over-year decline in steel production, better than the previous forecast of a 14.1% decline, driven by a strong growth in Chinese steel demand. With signs of recovery across the world in the second half of 2009, the association is anticipating global steel demand in 2010 to grow by 9.2% to 1,206 million tons, which is similar to the level in 2008.
With steel demand picking up in the last couple of months, steel producers are restarting facilities. Recently, U.S. Steel Corp. (X - Analyst Report) − the eighth largest steel producer in the world, the largest integrated steel producer headquartered in North America and one of the largest integrated flat-rolled producers in Central Europe, has restarted its blast furnace at its Hamilton, Ontario plant after a nine-month shutdown.
The current surge in steel demand narrowed losses for the third largest steel maker in the U.S. as well as for Steel Dynamics Inc. (STLD - Snapshot Report) and the largest recycler of steel scrap in the U.S. − Nucor Corporation (NUE - Analyst Report) − in the third quarter of 2009.
Gold’s value and wealth preservation attributes continued to attract investors and consumers. According to the World Gold Council (WGC), total demand for the metal in the third quarter of 2009 reached 800.3 tons, or $24.7 billion -- up 15% from the second quarter. Jewelry and investment demand in non-western markets rebounded from the very low levels seen in the first quarter, while industrial demand started to recover in response to an improvement in economic conditions.
The outlook for investment is positive overall, with absolute levels of demand likely to remain well supported by continued economic and currency uncertainty, inflation concerns and the search for diversification. We expect to see a continuing trend among central banks diversifying away from their dollar exposure in their reserves in favor of the proven store of value represented by gold. Barrick Gold Corporation (ABX - Analyst Report) and Newmont Mining (NEM) are showing strong levels of production.
WEAKNESSES
The global metal industry is cyclical, highly competitive and has historically been characterized by overcapacity (excess of supply over demand). Overcapacity in the industry could increase the level of metal imports and squeeze metal prices. In the recent years, capacity growth in China has significantly exceeded the growth in Chinese market demand. A continuation of this unbalanced growth trend or a significant decrease in China’s rate of economic expansion could result in China increasing metal exports.
Key metal consuming industries such as auto, shipbuilding and construction have been experiencing weak demand in the last few quarters, forcing global metal producers to slacken production levels. U.S. Steel slashed production by almost 62% during the second quarter of 2009, while Korean steel maker POSCO (PKX) had to shrink its output by about 15% in December last year. This was the first time in its history that POSCO was forced to take such a measure, proof of the unhealthy operating environment.
As a whole, the steel industry posted weak results in the third quarter of 2009. U.S. Steel recorded its third sequential loss − $3.03 billion, or $2.11 per share − in the third quarter of 2009, in contrast to a net income of $9.19 billion or $7.79 per share in the third quarter of 2008. Commercial metals company AK Steel (AKS) posted a negligible income of $6.2 million compared to $188.3 million in the same quarter of 2008.
Despite its relatively higher growth rate compared to the developed world, the outlook for the Indian economy is for lower growth rates compared to the last few years. Nearly 45−50% of the world gold production is consumed in India. Gold is a luxury item in this economy, and the demand downtrend is most visible in large cities where gold is consumed. A slow growth, low inflation and low interest-rate environment is a nightmare for the gold market.
Foreign currency is one of the major risks for gold producers, as they usually have their mining operations outside their countries. Revenues and costs for gold producers are primarily incurred in foreign currency. Kinross Gold (KGC - Analyst Report) is one of the top 10 gold producers, which has facilities in the U.S., Canada, Brazil, Chile, Russia and Africa. Although it has a diversified clientele, the operations are vulnerable to foreign currency risks. Hence, any adverse movement will affect cash flows and the profitability of the gold producer.
Despite a sharp rise in recent metal prices, future pricing remains uncertain, and we believe continued demand weakness, production resumption by some mills and lower iron ore and coking coal prices in the second half of 2009 may drive monthly prices down again. The recent significant reduction in global metal production in late 2008 and into 2009 has resulted in decreases in many raw material prices. We expect that such prices will rebound only when global metal production returns to more customary levels.
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The Metals & Mining Industry encompasses the extraction (mining), as well as the primary and secondary processing, of metals and minerals. The industry is rather concentrated in structure, with a few producers accounting for the lion’s share of sales.
Geographically, the Asia-Pacific region is witnessing higher production and consumption of metals, especially China and India. This is due to the per capita consumption in these two counties approaching the U.S./European levels, which could − theoretically at least − double metal demand in the longer term.
Historically, the automotive and construction markets have been the largest drivers of metal consumption, more than 50% of the total demand. Other metal consuming industries include energy, electrical equipment, agricultural, domestic and commercial equipment and industrial machinery. Large automakers such as General Motors, Ford Motor Company (F), Toyota Motor Corporation (TM) and Honda Motor Company (HMC) are big consumers of metals including steel and aluminum.
The steel industry, with companies engaged in the extraction of iron ore and coke coal for the processing of iron and steel, is a case in point. This industry includes metal ore exploration and mining services, 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. ArcelorMittal (MT) is the world’s largest steel company with production of 103.3 million tons in 2008.
The precious metals and minerals industry consists of companies engaged in the extraction and primary processing of gold, silver, platinum, diamond, semiprecious stones, uranium and other rare minerals and ores, along with the cultivation of pearls. The gold industry is dominated by Anglo American Plc., the largest gold producer by market capitalization. Demand for gold has been improving sequentially; however, it is significantly lower year over year, distorted by the exceptionally strong demand in 2008.
The outlook for jewelry demand continues to remain weak. While the US economy has shown tentative signs of a recovery, a high degree of uncertainty continues to dampen any improvement in discretionary spending. Total supply of gold worldwide contracted slightly in the last three months of 2009. The key factors weighing on the supply were an increase in producer de-hedging and a negative contribution from the official sector, in addition to lower levels of scrap than previous quarters.
OPPORTUNITIES
We expect the global metal demand to improve in the long term with the recovery of the user industries. China is expected to remain the largest consumer of metals in the coming years. Despite the current slowdown in consolidation within the global metal industry, mergers and acquisitions (M&A) activity remains a critically important growth strategy for companies. While the economic downturn is a significant factor in short-term decisions regarding M&A activity, mining companies expect to make acquisitions over the next three years.
There has been an upward movement in copper prices in recent months, primarily due to stockpiling in China. Market conditions are expected to be favorable for copper in the next couple of years due to higher consumption of the metal in the developing nations. Companies like Freeport-McMoRan Copper & Gold Inc. (FCX - Analyst Report) which have a high leverage to copper prices will benefit immensely from the potential demand for copper in the developing markets.
We also expect aluminum demand to increase over the next three years, outstripping supply growth. As a result, the aluminum market is likely to see deficit for a prolonged period. This provides a backdrop supportive of high alumina and aluminum prices. Leading aluminum producers such as Alcoa Inc. (AA - Analyst Report) should benefit from the improving outlook for aluminum and alumina prices.
The World Steel Association is forecasting an 8.6% year-over-year decline in steel production, better than the previous forecast of a 14.1% decline, driven by a strong growth in Chinese steel demand. With signs of recovery across the world in the second half of 2009, the association is anticipating global steel demand in 2010 to grow by 9.2% to 1,206 million tons, which is similar to the level in 2008.
With steel demand picking up in the last couple of months, steel producers are restarting facilities. Recently, U.S. Steel Corp. (X - Analyst Report) − the eighth largest steel producer in the world, the largest integrated steel producer headquartered in North America and one of the largest integrated flat-rolled producers in Central Europe, has restarted its blast furnace at its Hamilton, Ontario plant after a nine-month shutdown.
The current surge in steel demand narrowed losses for the third largest steel maker in the U.S. as well as for Steel Dynamics Inc. (STLD - Snapshot Report) and the largest recycler of steel scrap in the U.S. − Nucor Corporation (NUE - Analyst Report) − in the third quarter of 2009.
Gold’s value and wealth preservation attributes continued to attract investors and consumers. According to the World Gold Council (WGC), total demand for the metal in the third quarter of 2009 reached 800.3 tons, or $24.7 billion -- up 15% from the second quarter. Jewelry and investment demand in non-western markets rebounded from the very low levels seen in the first quarter, while industrial demand started to recover in response to an improvement in economic conditions.
The outlook for investment is positive overall, with absolute levels of demand likely to remain well supported by continued economic and currency uncertainty, inflation concerns and the search for diversification. We expect to see a continuing trend among central banks diversifying away from their dollar exposure in their reserves in favor of the proven store of value represented by gold. Barrick Gold Corporation (ABX - Analyst Report) and Newmont Mining (NEM) are showing strong levels of production.
WEAKNESSES
The global metal industry is cyclical, highly competitive and has historically been characterized by overcapacity (excess of supply over demand). Overcapacity in the industry could increase the level of metal imports and squeeze metal prices. In the recent years, capacity growth in China has significantly exceeded the growth in Chinese market demand. A continuation of this unbalanced growth trend or a significant decrease in China’s rate of economic expansion could result in China increasing metal exports.
Key metal consuming industries such as auto, shipbuilding and construction have been experiencing weak demand in the last few quarters, forcing global metal producers to slacken production levels. U.S. Steel slashed production by almost 62% during the second quarter of 2009, while Korean steel maker POSCO (PKX) had to shrink its output by about 15% in December last year. This was the first time in its history that POSCO was forced to take such a measure, proof of the unhealthy operating environment.
As a whole, the steel industry posted weak results in the third quarter of 2009. U.S. Steel recorded its third sequential loss − $3.03 billion, or $2.11 per share − in the third quarter of 2009, in contrast to a net income of $9.19 billion or $7.79 per share in the third quarter of 2008. Commercial metals company AK Steel (AKS) posted a negligible income of $6.2 million compared to $188.3 million in the same quarter of 2008.
Despite its relatively higher growth rate compared to the developed world, the outlook for the Indian economy is for lower growth rates compared to the last few years. Nearly 45−50% of the world gold production is consumed in India. Gold is a luxury item in this economy, and the demand downtrend is most visible in large cities where gold is consumed. A slow growth, low inflation and low interest-rate environment is a nightmare for the gold market.
Foreign currency is one of the major risks for gold producers, as they usually have their mining operations outside their countries. Revenues and costs for gold producers are primarily incurred in foreign currency. Kinross Gold (KGC - Analyst Report) is one of the top 10 gold producers, which has facilities in the U.S., Canada, Brazil, Chile, Russia and Africa. Although it has a diversified clientele, the operations are vulnerable to foreign currency risks. Hence, any adverse movement will affect cash flows and the profitability of the gold producer.
Despite a sharp rise in recent metal prices, future pricing remains uncertain, and we believe continued demand weakness, production resumption by some mills and lower iron ore and coking coal prices in the second half of 2009 may drive monthly prices down again. The recent significant reduction in global metal production in late 2008 and into 2009 has resulted in decreases in many raw material prices. We expect that such prices will rebound only when global metal production returns to more customary levels.
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