For Immediate Release
Chicago, IL – September 03, 2015 – Today, Zacks Equity Research discusses the Industrial Metals, part 3, including Rio Tinto plc (RIO), BHP Billiton Limited (BHP), Vale S.A (VALE), Fortescue Metals Group Limited (FMG.AX) and Alcoa (AA).
Industry: Industrial Metals, part 3
Link: https://www.zacks.com/commentary/55308/reasons-why-industrial-metals-are-slouching
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 the Construction space, the industry remains saddled by a number of headwinds. Below, we have discussed 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:
The Perennial Problem of the Industry – Oversupply
Iron: The threat of oversupply continues to plague the industry as major iron ore producers, Rio Tinto plc (RIO), BHP Billiton Limited (BHP), Vale S.A (VALE) and Fortescue Metals Group Limited (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.
The surging output are already overwhelming 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. Excess supply over demand, economic downturn in China and severe rivalry between mining giants will keep iron ore prices subdued. Weakening market prices of iron ore continue to hurt miners’ aggregate revenues and margins.
Aluminum: Alcoa (AA) now expects global aluminum markets to be in a surplus of 760,000 tons, 4,000 tons higher than previously estimated, and surplus of 2.2 million metric tons in China.
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. 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 tons 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 economic growth for the second quarter rose 7% year over year. Analysts have slashed their forecasts for China's growth over the next three years amid broadening pessimism over the health of the world's second largest economy. The gloomy outlook is the latest setback for China which has had a tumultuous few weeks.
The move by the country's central bank to devalue the yuan startled investors and roiled equity markets all over the world. Seeing a feeble impact from efforts to prop up jittery stock markets, Chinese authorities are now reportedly scaling back their market intervention plans.
The earliest economic indicator available for August -- the preliminary Caixin manufacturing purchasing managers' index (PMI) -- suggests persistent sluggishness in the country's vast factory sector. The index fell to a near six-and-a-half-year low of 47.1 in August, below Reuters’ forecast of 47.7 and down from 47.8 in the previous month.
Zacks "Profit from the Pros" e-mail newsletter provides highlights of the latest analysis from Zacks Equity Research. Subscribe to this free newsletter today. Find out What is happening in the stock market today on zacks.com.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
RIO TINTO-ADR (RIO): Free Stock Analysis Report
BHP BILLITN LTD (BHP): Free Stock Analysis Report
VALE SA (VALE): Free Stock Analysis Report
ALCOA INC (AA): Free Stock Analysis Report
To read this article on Zacks.com click here.
|