Mining (Ferrous & Non Ferrous) Stock Outlook - Jan 2014 - Industry Outlook
09 Januar 2014 - 11:03AM
Zacks
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
To read this article on Zacks.com click here.
Zacks Investment Research
Freeport McMoRan (NYSE:FCX)
Historical Stock Chart
Von Jun 2024 bis Jul 2024
Freeport McMoRan (NYSE:FCX)
Historical Stock Chart
Von Jul 2023 bis Jul 2024