Industrial metals are considered the building blocks of an economy. Despite global concerns adding an element of uncertainty to the outlook of late, 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 the industrial metals sector can look forward to in the coming months and years:
Rectifying the 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.
Similarly, China’s policy to clean up and consolidate the domestic steel industry is also working in favor of iron ore.
Trump Shoulders Much of the Hope
The industrial metals space has benefited from the Trump win. $500 billion provides opportunities for the industrial metal space. 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 anticipated 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) . Arconic also has a multi-year supply contract with Brazil-based leading commercial jets maker, Embraer worth around $470 million. The company also sealed a contract valued roughly $1 billion for the supply of proprietary alloys and plate products for every Airbus platform.
Construction to Sustain Demand
The housing and construction sector is the largest consumer of steel today and consequently, of iron ore. The construction sector is the second most rapidly growing sector after transportation in terms of aluminum usage. 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. 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 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 its 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 is likely to grow to comprise 46% of worldwide copper consumption by 2018.
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 in the past 20 years, it will be a major consumer in the years to come.
Renewed Optimism in China
For the second quarter, China’s economy grew by 1.7% in seasonally adjusted terms. It was in line with expectations but higher than 1.3% increase reported in the March quarter. China has maintained the momentum of steady and sound development in first-half 2017, laying a solid foundation for achieving the annual target and better performance. The Chinese government previously stated that it is aiming for a minimum growth rate of 6.5% this year, which looks more than achievable given the strength seen in the first half of the year.
Copper Demand from Electric Vehicles
The booming market for electric vehicles will significantly impact demand for copper over the next decade. Electric vehicles use a substantial amount of copper in their batteries, as well as in the windings and copper rotors used in electric motors. The metal is also required for busbars, used to connect modules and cells in battery packs, and in charging infrastructure. Big players like BHP Billiton and Glencore are likely to capitalize on the spike in demand in the future.
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?
Few Stocks in the Space Worth Adding
Amerigo Resources Ltd. (ARREF - 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. Estimates for Amerigo Resources for fiscal 2017 have gone up 25% over the past 30 days.
We suggest investors to add Coeur Mining, Inc. (CDE - Free Report) , Lundin Mining Corp. (LUNMF - Free Report) to their watch list. These stocks carry a Zacks Rank #3 (Hold) and their estimates have move north recently. Earnings estimate for fiscal 2017 for Coeur Mining has gone up 12% and for Lundin Mining the estimate for fiscal 2017 has moved up 9%.
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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