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Industrial Metals on the Mend: Good Time to Buy

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Industrial metals are considered the building blocks of an economy. At present, even though global concerns have added an element of uncertainty to the outlook, there are plenty of reasons to be optimistic about the industrial metals industry over the long term.

Here we discuss some of the key reasons and what investors in industrial metals can look forward to in the coming months and years:

Trump Shoulders Much of the Hope

The industrial metals space has benefited from the Trump win. His $500 billion infrastructure plan provides opportunities for the industrial metal space. Donald Trump’s promise to revive American infrastructure means commodities used to build everything from airports to bridges will gain under his presidency.

Automotive & Aerospace Hold the Key

On the demand side, aluminum consumption is expected to improve on a global basis, spurred on by the automotive and packaging industries – the key end markets. The automobile market is becoming increasingly aluminum-intensive, given the metal's recyclability and light-weight properties.

Automakers consumed a record amount of aluminum last year as plummeting prices and technological breakthroughs made it a viable alternative to steel. The global push to improve fuel efficiency in vehicles is anticipated to more than double the demand for aluminum in the auto industry by 2025.

The airline industry is also expected to boost demand for the metal. Arconic Inc. (ARNC - Free Report) has a long-term agreement with The Boeing Company (BA - Free Report) to supply multi-material aerospace parts, its fourth multi-year contract with the aerospace giant in a series of recentdeals. Arconic also has big aerospace deals with Airbus and Lockheed Martin Corp. (LMT - Free Report) , as well as a multi-year supply contract with Brazil-based leading commercial jets maker, Embraer, worth around $470 million. The deal makes Arconic the sole supplier for proprietary wing skins and fuselage sheet to Embraer.

The company also recently sealed a contract valued roughly $1 billion for the supply of proprietary alloys and plate products for every Airbus platform. The multi-year contract that started in Jan 2017 makes it the sole supplier to Airbus for specific applications. Additionally, Arconic has landed two new pacts with Airbus for the supply of 3D-Printing metal parts. The agreements further strengthen its position in the fast-growing metal 3D printing space.

To capitalize on the lucrative aerospace market, Arconic acquired RTI International, which broadened titanium offerings as well as added advanced technologies and materials to its portfolio. Moreover, the buyout of UK-based leading jet engine components maker Firth Rixson has allowed Arconic to grab more opportunities in the growing aerospace market through a broad spectrum of high-growth, value-added jet engine components.

Additionally, the acquisition of Tital, the Germany-based leading provider of titanium and aluminum structural castings, has strengthened Alcoa’s position to leverage growth in the commercial aerospace sector and, consequently, capture rising demand for advanced jet engine components made of titanium.

Construction: Building Block of Industrial Metals

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. in the past few quarters. Long-stalled construction projects are being renewed. Requirements for emerging projects, such as education facilities and government buildings, are also creating demand in the sector.

In the long term, as the urban population increases worldwide, so will the need for steel 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 as well as having a large share in the total production of pure copper, it’s no surprise that there is a strong correlation of the metal with ups and downs in China’s economy.

In the long haul, expectations of a rising middle class in Asia, particularly in India and China, who will spend more on consumer goods such as air conditioners and refrigerators in the years to come, will stimulate 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 had resorted to aluminum production cuts in the past few years. Likewise, Arconic has undertaken a number of restructuring measures (including closure of smelters) in the past few years, apart from aggressively pursuing cost-cutting actions.

Aluminium is expected to be in a deficit this year due to curtailments in China. Further, faced with smog in major cities, China is clamping down on polluting industries. With its high energy intensity and reliance on coal, aluminum could be in the forefront if Chinese government does take steps against polluting industries.

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 7.2% this year. Given that India's consumption of metals has 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?

Stocks in the Space Worth Adding

Investors can consider the following stocks in the industry that are backed by a solid Zacks Rank and estimate revisions.

Amerigo Resources Ltd. (ARREF - Free Report) can be a solid addition to one’s portfolio. The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. The stock has a positive earnings surprise history of 12.50% in the trailing four quarters and for fiscal 2017, the Zacks Consensus Estimate has moved up 80% to 9 cents per share.

Lundin Mining Corporation , another Zacks Rank #1 stock has an estimated long term earnings growth rate of 34.08%. Its estimates for the current fiscal have gone up 27% over the past 60 days.

With positive estimate revisions for the current fiscal of around 20% in the last 90 days and average positive earnings surprise of 79.97% in the last four quarters, Arconic is also another recommended buy. The stock currently sports a Zacks Rank #2 (Buy).

Check out our latest Industrial Metals Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is shaping up for this sector going forward.

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