For Immediate Release
Chicago, IL – September 01, 2015 – Today, Zacks Equity Research discusses the Industrial Metals, part 1, including BHP Billiton Limited (BHP), Vale S.A. (VALE), Rio Tinto plc (RIO), Alcoa Inc. (AA) and Freeport-McMoRan Inc. (FCX).
Industry: Industrial Metals, part 1
Link: https://www.zacks.com/commentary/55082/industrial-metals-reel-under-topsy-turvy-china
It did not come as a surprise when China, being the world’s top metals consumer, during its recent economic crisis dragged down the industrial metals market along with it. Commodities are now languishing at multi-year lows. To add to the industry’s woes, the latest data on the U.S. manufacturing sector showed an unexpected slowdown in growth to its weakest pace in almost two years in August as output, new orders and employment all grew at a slower pace. Moreover, the threat of oversupply looms large on the industry as inventory continues to pile up, while the once-frenzied demand in China has fizzled out.
Iron
Iron ore prices dropped to their lowest levels owing to a weaker Chinese steel market and surging low-cost supplies from Australia and Brazil, leading to a supply glut. The world’s largest miner, BHP Billiton Limited (BHP), posted its worst underlying profit in a decade of $6.4 billion for the year ended Jun 30, less than half of last year’s profit of $13.3 billion.
Vale S.A. (VALE) reported a 50% drop in second-quarter earnings while Rio Tinto plc (RIO) suffered an unceremonious drop of 42.9% in underlying earnings for first-half 2015. Macroeconomic issues such as recession in China, Greece debt negotiations and weak prices of commodities in the global mining industry were responsible for the dismal results across the board.
Notwithstanding the low prices, Vale reported record second-quarter iron ore production and aspires to produce even more down the line. BHP Billiton beat its own production guidance for iron ore in fiscal 2015 and stated that it was on track for additional growth in the current year, following major expansion work.
Aluminum
In 2015, falling oil prices took a toll on aluminum prices as aluminum is an energy intensive industry, with energy costs accounting for nearly 30% of the total cost of production. Further, growing exports from China and oversupply in different regions exerted pressure on aluminum prices throughout the first half of 2015 leading to record low aluminum prices. The average LME aluminium price decreased by 10.1% from $1,968 per ton in the fourth quarter of 2014 to $1,769 per ton in the quarter ended Jun 30 2015.
The global market experienced a surplus due to the 47% surge in export of aluminum semis from China. In order to generate cash flow, aluminum manufacturers had to export even at a loss, due to the slowdown in the domestic market.
Major aluminium producers, like Alcoa Inc. (AA) and RUSAL reported sequential drop in second quarter profits due to the price slump. RUSAL cut its 2015 demand growth forecast to 6% from the previous 6.5% due to weaker-than-expected demand in Russia, Brazil and Asia. Chinese apparent consumption growth is expected to slow to 9% in 2015. Alcoa reiterated its expectation of 6.5% global aluminum demand growth for 2015.
Copper
Concerns about Chinese economic growth rates, apprehensions surrounding Europe, continued U.S. dollar strength and weakness in commodity prices put pressure on copper prices during second-quarter 2015. LME copper prices averaged $2.74 per pound in the quarter and are currently sitting at six year lows of approximately $2.25 per pound.
Stockpiles tracked by the London Metal Exchange climbed to the highest in almost two years. China’s shrinking appetite for copper has hit the metal particularly hard as the country is responsible for over 45% of copper consumption. Demand from China has declined by 3% so far this year, even as global production has increased 3%, according to the International Copper Study Group.
After suffering its second straight quarterly loss, copper miner, Freeport-McMoRan Inc. (FCX) plans to trim its capital spending plans for 2016 by 26% from its July estimates. The company also intends to slash its 2016 minerals exploration costs from $100 million to $50 million and plans to cut copper sales by about 150 million pounds per year in 2016 and 2017. Freeport also intends to lower unit site production next year by 20%. The miner will suspend operations at its Miami mine in Arizona, halve production at its Tyrone mine in New Mexico and adjust rates at other of its seven copper mines in North America.
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