FCX Freeport McMoRan Inc

The rise in global population, growth in the Chinese economy, urbanization of the Asian countries and the increasing requirements in the developed countries have created an unprecedented demand for minerals and metals. The metals & mining industry caters to this ever-rising demand through extraction (mining) and primary and secondary processing of these metals. However, of late the tepid global economic growth emerged as a major headwind for the global metal industry.
 
Mining - Ferrous: Iron
 
Iron Ore Price Trends
 
Iron ore prices had an overall good run in 2013, compared to other base metals. Price peaked to a high of $154 per ton in February, due to the restocking carried out by Chinese steel mills and heightened demand from steel end-consumers, particularly the Chinese construction sector.

However, prices dipped to a low of $114.8 per ton in June due to the growing apprehension over China's economic outlook. The situation soon improved as price regained ground supported by increased imports into China as Chinese infrastructure spending boosted demand, averaging $136.32 in November.
 
Iron Ore Industry Performance
 
Demand for iron ore remained relatively strong in 2013. Domestic supply in China was insufficient to meet the demand triggered by the steel industry and the housing market. Chinese imports thus rose during the year, significantly impacting the demand for the metal worldwide.
 
To capitalize on the rising prices and elevated demand in China, iron mining majors BHP Billiton Limited (BHP), Rio Tinto plc (RIO) and Fortescue Metals Group Limited (FMG.AX) have invested heavily in projects in the iron-ore rich Pilbara region in Western Australia to augment their annual iron ore production capacity.

Separately, Vale S.A. (VALE) was recently granted an environmental license for its $20 billion investment in new iron ore production capacity at its Carajas mining complex in northern Brazil. This will help Vale to scale up its iron ore production and will be the largest project in Vale’s history as well as in the iron ore industry.
 
Iron Industry: Outlook
 
The major iron ore producers Rio Tinto, BHP Billiton and Fortescue Metals ramped up production in the later part of 2013, which will lead to a glut in supply in 2014. Furthermore, the world's top exporter Australia will increase its shipment as the abovementioned projects commence. Brazil and India will also hike their exports. In case this excess supply is not matched by adequate demand, it will expose the market to the risk of a decline in prices.
 
We believe the fate of iron ore prices now mainly hinges on Chinese demand.  The emergence of Chinese industrial demand has facilitated a paradigm shift in the iron ore market over the last two decades.

China is currently the largest producer of steel and consequently the largest consumer of iron ore, accounting for around 60% of the global seaborne market. China’s economy has risen 7.8% in the third quarter of 2013 compared with 7.5% in the second quarter. Iron-ore imports rose to a record 74.6 million tons in September triggered by an increase in demand for steel.
 
Thus, a rebound in China’s metal imports along with improvement in global manufacturing will push iron ore prices upward. Furthermore, iron ore prices will be supported by increased demand from steel markets in India, Japan and South Korea.
 
Mining - Non-Ferrous: Aluminium
 
Price Trends
 
Since Jan 2013, aluminium prices have slid downhill and recorded the lowest in November 2013 at $1740.8 per ton -- the first time the metal has traded below $1,750 since July 2009. Supply outpacing demand led to the dismal performance, which was aggravated by rising inventories. Industry results suffered because of the decline in realized aluminum prices.
 
Adaptive Measures to Combat Falling Prices
 
In the wake of falling prices, companies decided to cut back on production. Rusal, the world’s largest aluminum producer, reduced production by 9% in 2013 compared with 2012. Rusal continued to implement its inefficient capacity mothballing program and is focusing on cost reduction. Rusal has effectively attained almost a 3-year low cash cost within the aluminium segment.
 
In May, Alcoa Inc. (AA) announced its plans to curtail 460,000 million tons (or 11%) over a 15-month period and has since then closed or curtailed 274,000 metric tons or 60% of the capacity under review. Alcoa is also aggressively slashing costs and pursuing strategies to move down its cost curves in its upstream businesses. The company remains committed to achieving its target of moving down the cost curve by 10 percentage points in smelting and by 7 percentage points in refining by 2015.
 
The Ma’aden-Alcoa joint venture project that will create the world’s lowest-cost integrated aluminum facility with full annual operating capacity of 740,000 metric tons is 99% complete. It will contribute an estimated two percentage points towards Alcoa’s goal of lowering its position on the cost curve.
 
Aluminium Industry: Outlook
 
Until the market can work its way out of the oversupply, aluminum producers will continue to face the brunt in the form of low prices. Furthermore, energy prices and other input costs are expected to pose challenges for the industry. In addition to the curtailments, the companies will step up activities to reduce the escalating cost of raw materials.
 
In the medium to long term, aluminum consumption is expected to improve on a global basis. The revival is palpable in the automotive and packaging industries, one of the key consumer markets. The automobile market is also becoming increasingly aluminum-intensive, given the metal’s recyclability and light-weight properties. The global push to improve fuel efficiency in vehicles is expected to more than double the demand for aluminum in the auto industry by 2025. The airline industry is also expected to boost demand for the metal.
 
Following China, which accounts for over 40% of global aluminum consumption, India appears promising as its current low level of aluminum consumption and high urban population growth make a favorable combination. As a result, the aluminum market is likely to witness deficits for a prolonged period which creates a supportive backdrop of high alumina and aluminum prices.
 
Mining - Non-Ferrous: Copper
 
Movement in Copper Price & Performance
 
For most part of 2013, oversupply and lack of demand kept copper prices in check. LME spot copper prices averaged $3.60 per pound in the first quarter, $3.24 per pound in the second and $3.21 per pound in the third quarter, well below the record high of $4.60 per pound in 2011.  
 
Lower prices hurt the results of copper producers like Freeport-McMoRan Copper & Gold Inc. (FCX) and Southern Copper Corp. (SCCO) and Newmont Mining Corporation (NEM). Demand from key end-markets, including construction materials and electronics, remained weak due to the overall economic softness.
 
Diverse Reactions
 
In the wake of the recent decline in metal prices, Freeport has reduced budgeted future capital expenditures, exploration and other costs by a total of $1.9 billion in 2013 and 2014. Freeport is reviewing its portfolio of assets for opportunities of potential asset sales.
 
Freeport has recently taken a major step to venture into the U.S. energy space with the acquisition of Plains Exploration & Production Company and McMoRan Exploration Co. as part of the company’s strategy to diversify from its bread-and-butter copper mining business. The merger positions the combined entity as a leading natural resource conglomerate in the U.S.
 
On the contrary, banking on strong long term returns from the copper business, BHP Billiton and Rio Tinto are jointly investing $3 billion in a sea desalination plant that will supply water to Chile’s Escondida copper mine. BHP Billiton expects global demand for copper to rise by 3% annually.
 
Copper Industry: Outlook
 
The scenario in 2014 will be similar to 2013 with demand and supply imbalances. Notwithstanding the current volatility in prices, we have a long-term bullish stance on copper, supported by its widespread use, limited supplies from existing mines and the absence of significant new development projects.

Prices will be influenced by demand from China and emerging markets, economic activity in the U.S. and other industrialized countries. Companies that have a high leverage to copper prices will benefit immensely from the potential demand for the metal in the developing markets.
 
Overall Industry Ranking
 
Within the Zacks Industry classification, the Mining – Iron and Mining – Non-Ferrous industries are broadly grouped in the Basic Materials sector (one of 16 Zacks sectors). We rank all of 258 industries in the 16 Zacks sectors based on the earnings outlook for the constituent companies in each industry. This ranking is available in the Zacks Industry Rank page.
 
The way to align the ranking and outlook from the complete list of Zacks Industry Rank for the 258+ industries is that the outlook for the top one-third of the list (Zacks Industry Rank of #86 and lower) is positive, while the outlook for the bottom one-third (Zacks Industry Rank #172 and higher) is negative.
 
The Iron Mining industry features in the top 1/3rd with its Zacks Industry Rank #12 indicating a positive outlook, while the Mining- Non-Ferrous  features in the bottom 1/3rd at Zacks Industry Rank with a Zacks Rank of #222 indicating that the outlook is on the negative side. One could say that the near-term outlook for the group as a whole depicts a Neutral outlook.
 
Please note that the Zacks Rank for stocks, which are at the core of our Industry Outlook, has an impressive track record, verified by outside auditors, to foretell stock prices, particularly over the short term (1 to 3 months). The rank, along with Expected Surprise Prediction (ESP) (Read: Zacks Earnings ESP: A Better Way to Find Earnings Surprises) helps in predicting the probability of earnings surprises.
 
Sector Level Performance in Q3
 
In the Basic Material Sector, earnings increased 3.6% in the third quarter of 2013, faring better than the 9.9% decline in earnings witnessed in the second quarter of 2013. The Basic Material sector had a beat ratio (percentage of companies coming out with positive surprises) of 62.5%, higher than the 54.2% noted in the second quarter.
 
Q4 & Beyond: What Zacks Predicts
 
In the fourth quarter of 2013, earnings of the Basic Material sector is expected to grow 5%. However, in fiscal 2013, earnings is expected to decline 0.2% mainly due to the decline in earnings in the first half.
 
In fiscal 2014, earnings in the Basic Material sector is expected to improve gradually in the first half with 8% growth projected in the first quarter and 18% in the second quarter. In fiscal 2014, the sector’s earnings is projected to grow 17.6%.
 
Overall Industry Outlook
 
Overall in the metals market, increased supply and insufficient demand exerted a downward pricing pressure on commodities and this trend is expected to continue over the short term. Additionally, cost inflation is expected to be a headwind for metal and mining companies over the next several years, driven by a number of factors: labor, energy, ore grades, currencies, supply constraints and taxes. Global economic uncertainties, softening commodity prices, higher input costs are increasing the pressure on company margins.
 
To combat this, mining and metals companies are reviewing their portfolios to identify underperforming assets and shut down or divest these high cost and non-core assets. Industry consolidation, automation technology, owner-operated mines and investment in energy assets are some of the steps that companies are taking to mitigate the impact of rising costs.
 
Growth in the U.S. and an improving global macroeconomic scenario in tandem will boost demand in the industry. The long-term story for the industry remains intact as growth in the emerging markets, particularly in China and India, will be a major driver of metals demand.
 
BHP BILLITN LTD (BHP): Free Stock Analysis Report
 
FREEPT MC COP-B (FCX): Free Stock Analysis Report
 
NEWMONT MINING (NEM): Free Stock Analysis Report
 
RIO TINTO-ADR (RIO): Free Stock Analysis Report
 
SOUTHERN COPPER (SCCO): Free Stock Analysis Report
 
VALE SA (VALE): Free Stock Analysis Report
 
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