Chicago, IL – May 07, 2015 – Today, Zacks Equity Research discusses the Industrial Metals (Part 3), including Rio Tinto plc (RIO), BHP Billiton Ltd. (BHP), Vale S.A (VALE) and Fortescue Metals Group Ltd. ( FMG.AX). Industry: Industrial Metals (Part 3) Link: https://www.zacks.com/commentary/45251/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 would gain from healthy momentum in automotive and recovery in construction, the industry still remains saddled by a number of headwinds. Below, we discus some of the key reasons and what investors in the industrial metals sector can look forward to in the coming months as well as over the long term:
Threat of Oversupply Looms Large
Iron - The threat of oversupply continues to plague the industry as major iron ore producers, Rio Tinto plc (RIO), BHP Billiton Ltd. (BHP), Vale S.A (VALE) and Fortescue Metals Group Ltd. ( FMG.AX), have 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. Hence, 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. Iron exports from Brazil, the second largest exporter, have risen as a result of Vale increasing its production. Vale, which alone contributes almost 85% of Brazil’s iron ore, will continue to increase its iron output.
In case this excess supply is not matched by adequate demand, it will expose the market to a risk of further price declines.
Recently, BHP Billiton decided to put the brakes on its planned boost to iron ore production, becoming the first top miner to act on the matter of global supply glut that has sent prices for the commodity reeling. It announced that it is pushing out its $2 billion Port Hedland expansion. It would have increased the miner’s output by 20 million tons. The move will slow BHP’s planned production boost to 290 million tonnes a year by mid-2017 but would enable its proposed 20 million-ton-a-year expansion to be executed at lower costs.
The market took this as a sign that the top producers may begin to tackle oversupply which this year, which is expected to reach 90 million tons and only dip to around 80 million tons in 2016, the third consecutive year of excess production. The industry was also encouraged by the fact that export growth from Australia is showing signs of slowing.
Despite the announcement, BHP said it produced 59 million tons of iron ore in the three months through March, up one-fifth year over year. The company lifted its output forecast for the year through June, saying it now expects to log 230-million tons in output, 2% more than its earlier projection.
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.
ICSG projections for 2015 indicate that world refined copper production is expected to exceed apparent refined copper demand by 365,000 metric tons (t). According to ICSG projections for 2016, the copper market may show a second consecutive production surplus relative to demand. However, this is expected to be lower at 230,000 t as demand growth outpaces production growth.
Despite seeing an oversupplied market for copper in 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, leading to price weakness.
China’s GDP in the first quarter grew at the slowest pace since 2009 and its manufacturing activity also slowed down. China’s flash PMI fell to 49.2 in April, a fresh one-year low. China PMI has been below 50 in 2015, barring the exception of February. A PMI below 50 is another grim reminder of the slowdown in China.
Eurozone Worries Persist
The European economy has not recovered enough, as evident from the meager Euro zone GDP growth of 0.3% in the fourth quarter of 2014. Its biggest economy, Germany, expanded by just 0.7%. The European Commission is projecting 1.3% growth in 2015.
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 strengthening of the dollar has led to a drop in industrial metals’ prices.
At the recent FOMC (Federal Open Market Committee) meeting, the Federal Reserve did not rule out an interest-rate hike sometime later in June or September. The Federal Reserve said it expects the U.S. economy to rebound after slowing in the winter, reflecting transitory factors. An interest rate hike is likely to make the dollar stronger, which does not bode well for industrial metal prices.
Falling Oil Prices
The slump in oil prices to five-year lows had a visible impact on industrial metal prices. 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.
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