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Industrial metals are considered the building blocks of an economy. Despite global concerns adding an element of uncertainty to the outlook lately, 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:

Automotive & Aerospace to Fuel Growth

On the demand side, aluminum consumption is anticipated 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 projected to more than double the demand for aluminum in the auto industry by 2025.

Arconic (ARNC - Free Report) is well positioned to capture the growing demand for aluminium sheet due to the transition of the North American auto industry to lightweighting. It is the market leader in providing aluminium sheet to the North American automotive market. The company leverages its breakthrough Micromill technology that manufactures the most advanced aluminium sheet on the market.

The Micromill process produces an aluminium alloy that has 40% greater formability and 30% greater strength than the current automotive aluminium. Arconic expects its automotive sheet revenues to grow to $1.3 billion in 2018 from $76 million in 2010.

The airline industry is also anticipated to boost demand for the metal. Arconic has a long-term agreement with Boeing 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.

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 Remains a Pillar of Strength

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 United States 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 catalysts to support increasing urbanization and industrialization. Naturally, a rebound in construction bodes well for the iron ore and copper industries.

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 last few years, apart from aggressively pursuing cost-cutting actions.

Additionally, curtailments in China are expected to create aluminum deficit this year. 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.

Much Hope Pinned on Trump

The industrial metals space has benefited from the Trump win. Trump’s promise to revive American infrastructure means commodities used to build everything from airports to bridges will gain under his presidency.

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.

For the long haul, expectations are for a rising middle class in Asia, particularly in India and China, who are likely to spend more on consumer goods such as air conditioners and refrigerators in the coming years. This will stimulate demand for copper. Chinese demand for the metal is also likely to grow to comprise 46% of the worldwide copper consumption by 2018.

India to Support Demand Going Ahead

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, International Monetary Fund’s (IMF) projects India’s GDP growth to rise to 6.7% this year and 7.4% in the next 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

China reported third-quarter GDP growth of 6.8%, a tad lower than the second quarter's 6.9% expansion. The IMF forecast for growth in China is pegged at 6.8% for 2017. It is perceived that with an inflation-adjusted growth of 6.9% in the first half, China’s economy is on track to meet or likely exceed Beijing’s full-year target of around 6.5%.

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 Ltd. (BHP - Free Report) and Glencore are likely to capitalize on the spike in demand in the future.

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

Amerigo Resources Ltd. (ARREF - Free Report) can be a solid addition to one’s portfolio. Amerigo Resources sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Earnings estimates for Amerigo Resources for 2017 have skyrocketed 500% and surged 75% for 2018, in the past 30 days. The company has an average positive earnings surprise of 54.17% in the trailing four quarters.

Lundin Mining Corp. (LUNMF - Free Report) is another good pick with a Zacks Rank #1 and an average positive earnings surprise of 50% in the trailing four quarters. Earnings estimate for fiscal 2018 for the company has gone up 5% in the last 30 days.

We suggest investors add Freeport-McMoRan Inc. (FCX - Free Report) and Southern Copper Corp. (SCCO - Free Report) . These stocks carry a Zacks Rank #3 (Hold) and their estimates have moved north recently. Earnings estimates for Freeport-McMoRan have gone up 16% for 2017 and 15% for 2018 in the last 60 days. Earnings estimates for Southern Copper have moved up 13% for 2017 and 14% for 2018 over the same timeframe.

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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