Last year was nightmarish for industrial metals, with prices hitting multiyear lows due to the economic weakness in China, uncertainty about the global economy, and the Fed questions. However, this year has brought a ray of hope for industrial metals with some metals prices having rebounded this year. Yet global demand and production are unilaterally low, challenged by global economic uncertainty and volatility.

Nevertheless, growth in U.S GDP and continued improvement in end use sectors like automotive, aerospace, and construction will sustain increased demand for metals. This will lead to increased production and stabilization in the industry. Let’s take a closer look at the price movement of a few important metals so far this year and what lies ahead.

Iron

Having dipped below $40 per dry metric ton in Jan, iron ore prices climbed above $60 in early April, albeit briefly. Over the first half, iron ore prices averaged close to $50, yet they remain 13% below last year’s prices. Buoyant prices were buffeted by Beijing’s stimulus plans, replenishments by Chinese steel mills and historically low port stockpiles. The surge was also buffered by the announcement of the “big three” producers — BHP Billiton Limited (BHP - Analyst Report) , Rio Tinto plc (RIO - Analyst Report) and Vale S.A (VALE - Analyst Report) — having trimmed their full-year iron production guidance.

Aluminum

The slump in oil prices continue to take a toll on aluminum prices, given that the metal belongs to an energy intensive industry. Prices also suffered due to the oversupply of the metal, which was further aggravated by surging aluminum exports from China (the world’s biggest producer) amid waning domestic demand.

Despite depressed aluminium prices, productivity gains enabled Alcoa, Inc. (AA -Analyst Report) to report numbers that surpassed expectations. However, on a year-over-year basis, this New York-based aluminum giant’s earnings plunged 21% as falling prices continued to dent its sales and profits. Alcoa’s realized aluminum prices declined around 15% year over year.

Alcoa reaffirmed its expectation of global aluminum demand growth of 5% in 2016. Russian aluminum giant RUSAL expects to see demand grow at a healthy 5.7% in 2016 on the back of strong growth in North America, Europe and Asia.

The aluminum price rout had triggered Alcoa’s split into two companies – the upstream, raw materials company which will retain the Alcoa name, and the new entity named Arconic, which will comprise the Global Rolled, Engineered Parts and Transportation & Construction businesses. The transaction is expected to close in the second half of 2016.

Copper

Concerns about Chinese economic growth rates, apprehensions surrounding Europe, continued U.S. dollar strength and weakness in commodity prices put pressure on copper prices during 2015. Copper producers Glencore Plc (GLNCY -Snapshot Report) and Freeport-McMoRan Inc. (FCX - Analyst Report) announced production cuts amid a weak commodity price environment last year.

This year, however, prices have somewhat recovered on the back of strong U.S. economic data and expectations of a stimulus to growth in China and Europe. Demand has been relatively robust with imports from China, nearly half of the global trade in copper, hitting records during the first half of 2016. The 2016 copper prices touched a high and low through the end of June at $5,103.00 (on Mar 18) and $4,310.50 per ton (on Jan 15), respectively. Year-to-date average was $4,700.58 per ton, a 14.4% dip year over year.  

Industry Ranking & Outlook – Favorable

Within the Zacks Industry classification, the iron mining and non-ferrous mining industries (aluminum, copper, etc.) are grouped under the Basic Materials sector (one of 16 Zacks sectors). We rank the 257 industries in the 16 Zacks sectors based on the earnings outlook for the constituent companies in each industry. This ranking is available on the Zacks Industry Rank page.

The way to align the ranking and outlook from the complete list of Zacks Industry Rank for the 257+ companies is that the outlook for the top one-third of the list (Zacks Industry Rank of #86 and lower) is positive, the middle one-third (Zacks Industry Rank between #87 and #173) is neutral, while the outlook for the bottom one-third (Zacks Industry Rank #174 and higher) is negative.

The iron mining industry feature in the top tier with a Zacks Rank of #14, thereby garnering a positive outlook. The non-ferrous mining industry is ensconced in the middle tier with a Zacks Rank of #160, which depicts a neutral outlook.

Sector Level Earnings Trend

Q2 Earnings Scorecard, Projection for Future Quarters

Looking back at the second quarter scoreboard, the basic materials sector logged an 11.6% dip in earnings. While earnings are expected to further decline 0.7% in the third quarter, a dramatic recovery is anticipated in the fourth quarter, with 18.3% growth. (For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.)

What’s in Store?

Iron: Per the World Steel Association, global apparent steel use will continue on the downward trajectory with a 0.8% dip projected for 2016, while Chinese steel use will decline 4%. On the other hand, China’s neighbor, India, holds promise and will log a 5.4% improvement on the back of low oil prices, the reform momentum, and favorable policies to increase infrastructure and manufacturing output.

In the U.S., while low oil prices and a strong dollar remain dampeners, an improving job market and a strong housing sector will lead to 3.2% growth in steel demand. Major iron producers have announced expectations of production cuts. Obviously, the key to stabilize prices is to maintain the balance between demand and supply. The world's biggest iron ore exporter, Australia has cut its iron ore price forecast for 2016 to $44.2 a metric ton as the market fundamentals -- slow demand growth and a well-supplied market -- remain the same.

Aluminum: Aluminum prices will also remain under pressure given the oversupply of the metal in the market. However, the automotive, packaging and airline industries are expected to support demand. India appears promising given its currently low levels of aluminum consumption and high urban population growth. With demand being strong, the industry needs to pull the reins on supply, which will lead to deficits for a prolonged period and create the ground for higher aluminum prices, going forward.

Copper: In the short to medium term, new and expanded production should keep the market well supplied, despite announced cuts to higher-cost production. Longer term, the copper outlook remains positive as demand is supported by China’s shift towards consumption, in addition to the scope for substantial growth in other emerging markets.

We have a long-term bullish stance on copper, helped up by the fact of its having widespread use in transportation, manufacturing and construction, being of limited supplies from existing mines, and because of the absence of new significant development projects.

To Sum Up

The supply glut has to be balanced by production cuts to support prices. A further delay in the rate hike would also help the cause of industrial metals. Moreover, a recovery in the Chinese economy will help revive the industry. Besides that, projection of earnings growth and a favorable outlook for the industry instill investor confidence in the otherwise faltering industrial metals space.