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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 oligarchic in structure, with a few producers accounting for the lion’s share of production.
Geographically, the Asia-Pacific region is witnessing higher production and consumption of metals, especially China and India. Their per capita consumption levels are graduating to 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, accounting for 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 ([url=http://www.zacks.com/stock/quote/f]F[/url]), Toyota Motor Corporation ([url=http://www.zacks.com/stock/quote/tm]TM[/url]) and Honda Motor Company ([url=http://www.zacks.com/stock/quote/hmc]HMC[/url]) 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 ([url=http://www.zacks.com/stock/quote/mt]MT[/url]), world’s largest steel producing company, produced 73.2 million tons in 2009, representing 6% of the world steel output.
The precious metal and mineral 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.
In 2009, global gold supply exceeded global demand based on the rising gold prices. Supply surpassed demand by 15%. However, based on the marginal improvement in the economic environment in 2010, World Gold Council expects an increase in demand for jewelry, which in turn will help global gold demand to rise. Moreover, Chinese gold demand is expected to double in 10 years.
We expect the global metal demand to improve in the long term with the recovery of user industries. Despite some concerns about the sustainability of China’s growth profile, that country is expected to remain the largest consumer of metals in the future.
Despite the current slowdown in consolidation within the global metal industry, mergers and acquisitions (M&A) remain 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 was 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. ([url=http://www.zacks.com/stock/quote/fcx]FCX[/url]), 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 deficits for a prolonged period. This provides a backdrop supportive of high alumina and aluminum prices. Leading aluminum producers such as Alcoa Inc. ([url=http://www.zacks.com/stock/quote/aa]AA[/url]) should benefit from the improving outlook for aluminum and alumina prices.
The World Steel Association has forecasted a 10.7% increase in global steel demand in 2010 and 5.2% increase in 2011 compared to 2010 level. The increase will be driven by strong growth in Chinese steel demand. China's steel use is expected to increase by 6.7% to 579 million tons in 2010.
With steel demand picking up, steel producers are restarting facilities. Recently, U.S. Steel Corp. ([url=http://www.zacks.com/stock/quote/x]X[/url]) -- 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 will narrow losses for the third largest steel maker Steel Dynamics Inc. ([url=http://www.zacks.com/stock/quote/stld]STLD[/url]) and the largest recycler of steel scrap in the U.S., Nucor Corporation ([url=http://www.zacks.com/stock/quote/nue]NUE[/url]).
Gold’s value and wealth preservation attributes continue to attract investors and consumers. According to the World Gold Council, total demand for the metal is expected to rise in 2010. Jewelry and investment demand in non-western markets has rebounded from the low levels in 2009, while industrial demand has 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 ([url=http://www.zacks.com/stock/quote/abx]ABX[/url]) and Newmont Mining ([url=http://www.zacks.com/stock/quote/nem]NEM[/url]) are showing strong levels of production.
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 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 experienced weak demand in the last year, forcing global metal producers to slacken production levels. U.S. Steel slashed production by almost 37% in 2009, while Korean steel maker POSCO ([url=http://www.zacks.com/stock/quote/pkx]PKX[/url]) had to scale down output by about 10.9%.
As a whole, the steel industry posted weak results in fiscal 2009. U.S. Steel Corp. recorded a net loss of $1.4 billion, or $10.42 per share in 2009, in contrast to a net income of $2.1 billion or $17.96 per share in 2008. In 2009, commercial metals company AK Steel ([url=http://www.zacks.com/stock/quote/aks]AKS[/url]) posted a net loss of $74.6 million compared to a net income of $4.0 million in 2008.
Despite its relatively higher growth rate compared to the developed world, the outlook for the Indian economy suggests 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 ([url=http://www.zacks.com/stock/quote/kgc]KGC[/url]) 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 as in 2009 may drive prices down again.
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