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Why You Should Bank on Industrial Metals for the Long Term
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Industrial metals are considered to be the building blocks of an economy. Despite concerns of a looming global trade war — due to the recent imposition of tariffs — 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 Catalysts for Sustained 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. 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.
The airline industry will grow on the back of strength in the commercial segment on higher air travel demand, new aircraft orders and strong order backlog. This in turn will boost demand for the metal.
Growing Construction Activity to Stoke 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 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 requirement 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, Alcoa Corporation (AA - Free Report) has undertaken a number of restructuring measures (including closure of smelters) in the last few years, apart from aggressively pursuing cost-cutting actions.
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.
Imposition of Tariffs to Protect Domestic Aluminium Industry
The industrial metals space has benefited from the Trump win. The President’s promise to revive American infrastructure means commodities used to build everything from airports to bridges will benefit under his administration. Protecting U.S. manufacturing from imports was among his key campaign promises. In these lines, Trump has thus imposed a 10% tariff on aluminum imports following the U.S. Department of Commerce’s investigations under Section 232 of the Trade Expansion Act of 1962.
The reports concluded that the quantities of steel and aluminum imports “threaten to impair the national security,” as defined by Section 232. Aluminum imports had risen to 90% of total demand for primary aluminum.
In the aluminum industry, employment fell by 58% in the 2013-2016 period with six smelters being shut down, and only two of the remaining five smelters operating at capacity, despite growth in demand. US aluminium production and the capacity utilization rate fell over the last few years as companies idled plants in response to lower global aluminium prices.
Per the recommendation of the Commerce Department, the imposition of tariff on imports would increase domestic aluminium production from its present capacity of 48% to approximately an 80% operating rate. This is the minimum rate needed for the long-term viability of the industry.
Domestic players will heave a sigh of relief. While Century Aluminum (CENX - Free Report) welcomed the Section 232 tariffs and plans to restart one of its plants, Alcoa, being a global aluminum company, is at a higher risk from lower global aluminium prices.
Pickup in Economic Activity to Drive Copper Demand
Copper is a major industrial metal and plays 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 are likely to spend more on consumer goods such as air conditioners and refrigerators in the coming years 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-enhancing reforms and favorable policies to improve infrastructure and manufacturing output. Also, International Monetary Fund’s (“IMF”) remains bullish on the Indian economy and projects India’s GDP growth to rise to 7.4% in 2018 and 7.8% in the next, making it the fastest growing country among emerging economies. 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's economy grew 6.9% in 2017 ahead of the government target of around 6.5%. Growth came despite widespread concerns over a government-led economic restructuring. Notably, China's final GDP figure for 2016 was at 6.7% — the lowest in 26 years. The IMF forecast for growth in China is pegged at 6.6% for 2018 and 6.4% for 2014. China, for its part, will keep its target for economic growth at around 6.5% for 2018, unchanged from last year.
Renewed Interest in Mergers
There have been a revival in mining and metals in 2017. Going forward, deals will be fueled by the industry's return to investment-led strategies aimed at building portfolios rather than the divestment-oriented deals that dominated in 2017.
Mining companies have also started rewarding their long suffering shareholders, resuming share buybacks and announcing dividends. Rio Tinto plc (RIO - Free Report) has carried out buybacks and announced record dividends, while BHP Billiton Limited (BHP - Free Report) announced a record dividend last August. Glencore PLC (GLNCY - Free Report) has also reinstated paying dividends.
Copper Demand from Electric Vehicles
The booming market for electric vehicles will significantly impact demand for copper over the next decade. An electric vehicle needs about four times more copper than a traditional ICE (internal combustion engine) vehicle. The red 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.
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
For investors keen on playing these industries, we recommend VALE S.A. (VALE - Free Report) which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In the last 30 days, earnings estimates for VALE have gone up 125% for the first quarter of 2018 and up 20% for 2018. The company has an average positive earnings surprise of 12.60% in the trailing four quarters.
We also suggest investors to add Energy Fuels Inc. (UUUU - Free Report) which carries a Zacks Rank #3 (Hold). Its estimates for 2018 have moved north recently.
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Why You Should Bank on Industrial Metals for the Long Term
Industrial metals are considered to be the building blocks of an economy. Despite concerns of a looming global trade war — due to the recent imposition of tariffs — 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 Catalysts for Sustained 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. 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.
The airline industry will grow on the back of strength in the commercial segment on higher air travel demand, new aircraft orders and strong order backlog. This in turn will boost demand for the metal.
Growing Construction Activity to Stoke 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 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 requirement 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, Alcoa Corporation (AA - Free Report) has undertaken a number of restructuring measures (including closure of smelters) in the last few years, apart from aggressively pursuing cost-cutting actions.
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.
Imposition of Tariffs to Protect Domestic Aluminium Industry
The industrial metals space has benefited from the Trump win. The President’s promise to revive American infrastructure means commodities used to build everything from airports to bridges will benefit under his administration. Protecting U.S. manufacturing from imports was among his key campaign promises. In these lines, Trump has thus imposed a 10% tariff on aluminum imports following the U.S. Department of Commerce’s investigations under Section 232 of the Trade Expansion Act of 1962.
The reports concluded that the quantities of steel and aluminum imports “threaten to impair the national security,” as defined by Section 232. Aluminum imports had risen to 90% of total demand for primary aluminum.
In the aluminum industry, employment fell by 58% in the 2013-2016 period with six smelters being shut down, and only two of the remaining five smelters operating at capacity, despite growth in demand. US aluminium production and the capacity utilization rate fell over the last few years as companies idled plants in response to lower global aluminium prices.
Per the recommendation of the Commerce Department, the imposition of tariff on imports would increase domestic aluminium production from its present capacity of 48% to approximately an 80% operating rate. This is the minimum rate needed for the long-term viability of the industry.
Domestic players will heave a sigh of relief. While Century Aluminum (CENX - Free Report) welcomed the Section 232 tariffs and plans to restart one of its plants, Alcoa, being a global aluminum company, is at a higher risk from lower global aluminium prices.
Pickup in Economic Activity to Drive Copper Demand
Copper is a major industrial metal and plays 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 are likely to spend more on consumer goods such as air conditioners and refrigerators in the coming years 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-enhancing reforms and favorable policies to improve infrastructure and manufacturing output. Also, International Monetary Fund’s (“IMF”) remains bullish on the Indian economy and projects India’s GDP growth to rise to 7.4% in 2018 and 7.8% in the next, making it the fastest growing country among emerging economies. 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's economy grew 6.9% in 2017 ahead of the government target of around 6.5%. Growth came despite widespread concerns over a government-led economic restructuring. Notably, China's final GDP figure for 2016 was at 6.7% — the lowest in 26 years. The IMF forecast for growth in China is pegged at 6.6% for 2018 and 6.4% for 2014. China, for its part, will keep its target for economic growth at around 6.5% for 2018, unchanged from last year.
Renewed Interest in Mergers
There have been a revival in mining and metals in 2017. Going forward, deals will be fueled by the industry's return to investment-led strategies aimed at building portfolios rather than the divestment-oriented deals that dominated in 2017.
Mining companies have also started rewarding their long suffering shareholders, resuming share buybacks and announcing dividends. Rio Tinto plc (RIO - Free Report) has carried out buybacks and announced record dividends, while BHP Billiton Limited (BHP - Free Report) announced a record dividend last August. Glencore PLC (GLNCY - Free Report) has also reinstated paying dividends.
Copper Demand from Electric Vehicles
The booming market for electric vehicles will significantly impact demand for copper over the next decade. An electric vehicle needs about four times more copper than a traditional ICE (internal combustion engine) vehicle. The red 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.
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
For investors keen on playing these industries, we recommend VALE S.A. (VALE - Free Report) which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In the last 30 days, earnings estimates for VALE have gone up 125% for the first quarter of 2018 and up 20% for 2018. The company has an average positive earnings surprise of 12.60% in the trailing four quarters.
We also suggest investors to add Energy Fuels Inc. (UUUU - Free Report) which carries a Zacks Rank #3 (Hold). Its estimates for 2018 have moved north recently.