Last year, the slowdown in China and the subsequent crash in commodity prices had left miners in a lurch. Miners saw millions being wiped out and, in the wake of falling demand, the only way to stay afloat was to cost control. Saddled with debt, most miners had to sell off underperforming assets. This year, the mining industry seems to be on a better footing, having staged a comeback.
What Has Turned the Tide This Year?
This year, gold and silver have been major movers. Worries over the global economy, Brexit-induced volatile equity markets, the Federal Reserve’s stance to maintain steady interest rates and the introduction of negative interest rates by several central banks boosted growth of these safe-haven assets.
Gold prices are generally aided by retail demand for the metal in the latter part of the year, as it is a seasonally strong period in countries like India and China. Robust industrial demand and dwindling supplies for silver also sets the stage for silver prices to rise further.
Copper prices have seen steady gains in 2016, halting the steady decline in prices over the past five years. Demand has been relatively robust with imports from China, responsible for nearly half of the global trade, hitting records during the first half of 2016. Demand for copper will remain strong, backed by its widespread use in transportation, manufacturing and construction, limited supplies from existing mines, and the absence of new significant development projects.
For aluminum, automotive, packaging and airline industries are anticipated 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.
The housing and construction sector is the largest consumer of steel today and, consequently, of iron ore. In the U.S., an improving job market and a strong housing sector will lead to 3.2% growth in steel demand this year.
What Does the Crystal Ball Predict?
As per the Zacks Industry classification, the mining industry is grouped under the Basic Material sector – one of the 16 broad Zacks sectors. Though sector growth will remain in the negative territory in the third quarter, a dip of 2.3% projected for the quarter which is not that steep compared to the previous drop.
However, a dramatic recovery is projected during the fourth quarter with an 18.8% growth. The sector will log growth of 14.7% and 8.4% in the first and second quarters of 2017 respectively. (For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.)
Thus, a collusion of factors has prepared the ground for basic materials to win back the favor of investors after disappointing last year. It would be a prudent move to zero in on some momentum stocks in the materials space right now. These stocks exhibit all signs of healthy prospects.
Basic Materials Sector Price Index
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