For Immediate Release
Chicago, IL – January 08, 2015 – Today, Zacks Equity Research discusses the Industrial Metals (Part 3), including Rio Tinto plc (RIO-Free Report), BHP Billiton Limited (BHP-Free Report) and Vale S.A (VALE-Free Report).
Industry: Industrial Metals (Part 3)
Link: https://www.zacks.com/commentary/37161/what39s-weighing-on-industrial-metal-stocks
For the industrial metals industry, demand will remain strong in the years to come given their varied uses. While industrial metals should gain from healthy momentum in automotive and recovery in the construction space, the industry still remains saddled by a number of headwinds.
Below, 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.
Threat of Oversupply Looms Large for the Industry
Iron - The threat of oversupply plagued the industry in 2014 as major iron ore producers -- Rio Tinto plc (RIO-Free Report), BHP Billiton Limited (BHP-Free Report), Vale S.A (VALE-Free Report) and Fortescue Metals Group -- ramped up production. They intend to continue exploring for iron ore in Australia despite lower growth forecasts from China and weaker iron ore prices, betting on continued strength in iron ore demand over the long term. Thus, Australia, the world's top exporter of iron ore, will rev up its shipments.
Australia cut its iron ore price estimate for 2015 by 33% as the surging output will overwhelm Chinese demand growth, leading to a supply glut. Brazil, the second largest exporter, will follow suit. Vale, which alone contributes almost 85% of Brazil’s iron ore, has seen its iron ore exports increase by 7.6% year over year in the January to November 2014 timeframe. In case this excess supply is not matched by adequate demand, it will expose the market to a risk of further price declines.
Copper - The International Copper Study Group has projected that the copper market, after five straight years of deficits, should swing into a 2015 production surplus of roughly 390,000 tons. This is less than a month of current daily demand.
Despite seeing an oversupplied market for copper the next few years, Rio Tinto and BHP (separately and in joint ventures) plan to mine millions of additional tons of copper. They are amassing vast copper holdings to capture a greater chunk of the $140 billion global market in a bid to eventually squeeze out high cost producers just as they did in the global iron ore business.
Slowdown in China
Demand in China that alone accounts for a major portion of the industrial metal demand has slowed down due to the country's tepid property market and weaker infrastructure investment growth. China’s economic growth has cast a shadow on investors' view of commodities demand and, as a result, brought down demand for metals, creating price weakness.
Eurozone Worries Persist
The European economy has not recovered enough as is evident from the meager Eurozone GDP growth of 0.2% in the third quarter of 2014. Germany and France, two of the Eurozone’s largest economies have avoided recession by a whisker. Germany managed to scrape through with 0.1% growth and France recorded 0.3%.
Greece, however, has finally come out of the woods after nearly six years of economic misery. The Eurozone’s current growth pace is only about half the potential growth rate and that the GDP is still more than 2% below its level at the start of 2008.
A Stronger U.S. Dollar
Base metals as commodities move in opposite directions to the dollar. Both markets remain closely linked to each other as every turn in the dollar is either followed by, or coincides with, a turn in the price of commodities. The dollar skyrocketed during the second half of 2014 which led to a drop in industrial metals’ prices.
Falling Oil Prices
The slump in oil prices to five-year lows has had a visible impact on industrial metal prices in the latter half of 2014. A sharp and sustained drop in oil is generally associated with declining sales and prices of other commodities. The entire commodities sector may be impacted negatively in the wake of the current oil price carnage.
New LME Warehousing Rules to Likely Affect Aluminum Prices
In 2013, the London Metal Exchange (LME) announced new rules which were scheduled to come into effect on Apr 1, 2014 that would require LME warehouses, under certain conditions, to deliver more aluminum than they take in. Although in Mar 2014, a court in the United Kingdom ruled that the LME’s consultation process in developing the new rules had been unfair and unlawful, in October, a court of appeal in the country upheld the consultation process to be fair.
In case a new warehousing rule takes effect, it would lead to an increase in the supply of aluminum in the physical market and may cause regional delivery premiums, product premiums and LME aluminum prices to fall.
Bottom Line
Global uncertainties and oversupply conditions of base metals are some of the sector’s worst detractors. But what about investing in the space right now -- are there opportunities for short-term investors overriding the headwinds?
Check out our latest Industrial Metals Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy now.
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