Oversupply, Rate Hike Remain Headwinds for Industrial Metals

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 Construction, 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 should be wary of in the coming months as well as over the long term:

The Perennial Problem of Oversupply

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 ramped up production in recent years. These producers intend to continue exploring for iron ore in Australia on optimistic sentiments about continued strength in iron ore demand over the long term. Hence, Australia, the world's top exporter of iron ore, will gear up for reinforcing shipments.

Excess supply over demand and severe rivalry between mining giants will keep iron ore prices in check. Weakening market prices of iron ore continue to hurt miners’ aggregate revenues and margins.

Copper: Chile is expected to contribute significantly to growth in 2017. However, as per reports, Peru is set to topple Chile as the world’s fastest-growing copper mining nation. An estimated full 18 new copper projects are set to start production across Peru by 2021. National output is expected to hit 4.8 million tons per year by 2021, more than double the 2.3 million tons of output last year.

Rio Tinto and BHP (separately and in joint ventures) plan to mine millions of additional tons of copper. These companies 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 in the past few years 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.

The International Monetary Fund’s (IMF) forecast for growth in China is pegged at 6.7% for 2017. As per the IMF, a faster slowdown in China could have a serious impact on trade, commodity prices and investor confidence, and lead to a more generalized slowdown in the global economy. Even though the recent upbeat GDP figures raise hope, it remains to be seen whether it can be sustained.

Weakness in Emerging Economies

Steel demand in some emerging economies continues to be weak. A deteriorating external environment, in the form of weak exports, low commodity prices, capital outflows and currency devaluation, adds to the woes of these economies. Moreover, geopolitical undercurrents and internal tensions remain a major concern for these nations.

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 can lead to a drop in industrial metals’ prices.

Interest Rate Hike

The Federal Reserve hiked interest rate for the second time this year by 25 basis points to a range of 1% to 1.25% and maintained the outlook for one more rate hike in 2017. Higher rates normally translate into a stronger dollar which results in lower metal prices.

Bottom Line

Global uncertainties and oversupply conditions of base metals are some of the sector’s worst detractors. But what about investing in the space right now; are there opportunities for short-term investors overriding the headwinds?

Check out our latest Industrial Metals Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy now.

Stocks to Avoid for the Time Being

We presently recommend investors to stay away from the following industrial metal stocks as they presently have an unfavorable Zacks Rank. The downward estimate revisions also indicate that they are not profitable investment options for now.

Particularly, we suggest staying away from  or getting rid of Zacks Rank #4 (Sell) stocks such as KAZ Minerals plc (KZMYY), VALE S.A and Fortescue Metals Group Ltd. (FSUGY). Estimates for fiscal 2017 for Kaz Minerals have gone down 18% in the past 60 days and for Fortescue Metals Group have dipped 8%. The estimate for fiscal 2017 for Vale has gone down 21% in the past 60 days.

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VALE S.A. (VALE) : Free Stock Analysis Report
Rio Tinto PLC (RIO) : Free Stock Analysis Report
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Fortescue Metals Group Ltd. (FSUGY) : Free Stock Analysis Report
BHP Billiton Limited (BHP) : Free Stock Analysis Report
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