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Industrial Metals Stock Outlook - December 2016

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Metals prices have staged a rebound after hitting multi-year lows last year due to economic weakness in China and the interest rate hike. Metals prices have swung up wildly ever since Trump’s election. This can chiefly be attributed to Trump’s promise to go on an infrastructure spending binge that would boost demand for basic materials and metals.

As widely expected, the Fed raised benchmark interest rates by a quarter of a percentage point to 0.5–0.75% from 0.25–0.5%, citing improvement in the labor market and a strengthening U.S. economy. Further, the Fed signaled faster pace of hikes next year. Higher rates normally translate into a stronger dollar, which leads to lower metal prices. However, base metals have been stable despite the rate hike.

Let’s take a closer look at the price movement of a few important metals this year and what lies ahead.

Iron

In the last three years, the industry witnessed an iron ore price slump as the world’s largest producers BHP Billiton Limited (BHP - Free Report) , Rio Tinto plc (RIO - Free Report) and Vale S.A (VALE - Free Report) expanded low-cost supply in a bid to squeeze competitors, consequently adding to the supply glut. However, iron ore prices have been rallying this year and are currently trading above the $80 a ton level.

Year to date, the price of the steelmaking raw material is up 83%, a massive recovery from the near-decade lows in Dec 2015. The surge was largely attributed to strong infrastructure investment in China and the slowdown in supply growth following Beijing’s decision to close 100–150 million tons of steel capacity through the end of the decade in a bid to increase profitability of remaining producers and tackle pollution.

Aluminum

Aluminum prices have also been gaining this year owing to an improved supply-demand dynamics, the Trump win and higher coal prices. This year, global aluminum markets are anticipated to record their first deficit year in a decade. In previous years, aluminum prices suffered due to the oversupply of the metal, which was further aggravated by surging aluminum exports from China (the world’s biggest producer) amid waning domestic demand. Finally, China has cut down on its aluminum production, which is a positive sign for aluminum producers such as Alcoa Corp. (AA - Free Report) , Norsk Hydro, Rio Tinto and Century Aluminum Co. (CENX - Free Report) .

Copper

Copper prices had been in a steady decline since 2011, pulled down by China’s slowing economic growth. Copper producers Glencore Plc (GLNCY - Free Report) and Freeport-McMoRan Inc. (FCX - Free Report) announced production cuts amid a weak commodity price environment last year. After vastly underperforming compared with other metals and steelmaking raw materials in 2016, copper has caught up this year and is now up almost 26% year to date. A pickup in global manufacturing activity and hopes about Trump's $500 billion infrastructure are the primary reasons for the red metal’s recovery.

Industry Ranking & Outlook - Mixed Bag

Within the Zacks Industry classification, the iron mining and non-ferrous mining industries (aluminum, copper, etc.) are grouped under the Basic Materials sector (one of 16 Zacks sectors). We rank the more than 250 industries in the 16 Zacks sectors based on the earnings outlook for the constituent companies in each industry. This ranking is available on the Zacks Industry Rank page.

The way to align the ranking and outlook from the complete list of Zacks Industry Rank for the 257 companies is that the outlook for the top one-third of the list (Zacks Industry Rank of #86 and lower) is positive, the middle one-third (Zacks Industry Rank between #87 and #173) is neutral, while the outlook for the bottom one-third (Zacks Industry Rank #174 and higher) is negative.

The iron mining industry is currently in the top tier with a Zacks Rank of #14, thereby garnering a positive outlook. The non-ferrous mining industry is ensconced in the bottom tier with a Zacks Rank of #207, which depicts a negative outlook.

Sector Level Earnings Trend

Q3 Earnings Scorecard, Projection for Future Quarters

Looking back at the second quarter scoreboard, the basic materials sector logged a 4.7% increase in earnings. Earnings are expected to improve 0.3% in the fourth quarter. In 2017, earnings a growth is expected to remain positive with 10.2%, 7.2% and 5.2% in the first, second and third quarters. (For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.)

What’s in Store?

Iron: Per the World Steel Association, global apparent steel use will rise 0.2% in 2016. A better-than-expected forecast for China, along with continued growth in emerging economies, will help the global steel industry to move back to a positive growth path for 2016 and onwards. Amid rising prices this year the big three producers trimmed their full-year iron production guidance this year. This will help strike a balance between supply and demand, and thus support prices.

Aluminum: Aluminium demand witnessed growth of 5% in 2016. Chinese demand, which accounts for about half of total demand, is likely to be maintained by the building and construction sector as well as the automotive and railway sectors. With the country deciding to cut capacity by 4.6 million tons per year, supply will also be in check. Moreover, in North America, demand should remain robust, mainly due to building and construction, automotive, packaging and airline industries. India appears promising given its currently low levels of aluminum consumption and high urban population growth.

Copper: Copper prices are likely to be influenced by demand from China and emerging markets, as well as economic activity in the U.S. and other industrialized countries. The timing of the development of new supplies of copper, along with production levels of mines and copper smelters are also expected to influence price. The long-term fundamentals of the metal remain positive, supported by its significant role in the global economy and a challenging long-term supply environment attributable to difficulty in replacing output of existing large mines with new production sources.

To Sum Up

Growth in U.S GDP and continued improvement in end use sectors like automotive, aerospace and construction will sustain increased demand for metals. This is likely to lead to increased production and stabilization in the industry. Pulling the reigns on supply will help stabilize prices. Trump's infrastructure push should provide some support. Projection of earnings growth and a favorable outlook for the industry instill investor confidence in the industrial metals space.

Stocks that are well placed in the current operating backdrop include Vale S.A., Fission Uranium Corp. (FCUUF - Free Report) , Fortescue Metals Group Ltd. (FSUGY - Free Report) and Kumba Iron Ore Ltd. . All of these stocks sport a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

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