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METALS AND MINING SECTOR


Rahul Verma
May 10, 2016, 11:20 p.m.

Introduction-Metals and Mining Sector - A Great Opportunity!

-Report By Rahul VermaMetals and Mining sector lays the foundation of any economy, but in the last couple of years the sector has performed very poorly. World’s biggest companies are looking for ways to sustain in the market, China’s overproduction, decrease in demand the world’s shift from manufacturing to services has led us to this situation. The mining sector in recent times has hit the rock bottom as the mining companies are not able to cover the operational expenses as well. Some companies have started moving away from the mining sector to return only when the situations are favorable.
  • Canada based Century Iron Mines is selling Australian eggs to China
  • Gina Rinehart entered into Chinese market of Infant Milk, while some others are getting into medical marijuana
  • US Global has launched “Global Airline ETF”

The Reasons for the Downslide

Boom and bust in any sector is cyclic and bound to happen but this bust has to do mainly with the slowdown in the Chinese Juggernaut. The dragon was responsible for 41% metal consumption worldwide but has hit a slowdown as Edgar Basto, Asset President BHP Billiton Western Australia Iron Ore said “Following a decade of strong growth, driven by fixed asset investment, the Chinese economy is transitioning into the next phase of its development. This phase of growth is underpinned by consumption and services and is inherently less steel intensive”.There were a series of events that led to this slowdown in the Metal and Mining Industry:-
  • Over the years the demand for steel and other metals which were required for infrastructure and industry growth in the developed countries has mellowed down.
  • The Chinese followed a decade long policy of being a manufacturing hub and most of the metal produced was consumed locally but since the Chinese are moving towards growth by consumption and services, their domestic metal consumption is reducing.
  • With less domestic consumption the Chinese had a lot of inventory, with so much inventory they tried to dump it in international market, they increased exports from 43 million tonnes in 2014 to 93million tonnes in 2015 thus reducing the international price of all the metals
  • The Chinese industry steel industry alone lost $ 10 Billion USD thus proving that they were dumping
Now we will look how bad the industry was hit because of the above mentioned factors:-
  • BHP Billiton the biggest public traded mining company has cut cost by $ 10 Billion USD in 2014-15 and had planned to cut another $ 4.6 billion USD in operations in financial year 15-16 to stay afloat
  • Rio Tinto the world’ second largest traded mining company is also cutting cost in operations to stay competitive
  • Petropavlovsk once valued at over $ 3 Billion USD ran out of money, its stocks listed on London stock exchange were at GBP 293.8 on 22 April 2011, has hit a record low of GBP 5.12 on 20th January 2016, showing a decline of about 98.2%
  • TFX ventures another metal giant is also down by 90% in real terms
  • Tata Steel the Indian metal giant hit a 5 year low in September 2015
Let us now look at how some of the major market movers have performed in the last couple of years.First we will look at BHP Billiton which is the world’s biggest traded mining company.metals and mining sector1BHP Billiton is an Australian company and is listed at Australian Stock Exchange. As we can see that the stock price was in the tune of is AUD 35 in July’14 and was only around AUD 14 in January’16 hence we can say that there is a fall of about 60% in the stock price in the last one and half year.Now we will look at Rio Tinto which is the second biggest traded company.metals and mining sector2Rio Tinto is a British – Australian mining and metal company headquartered in London, United Kingdom and a management office in Melbourne, Australia it is listed in Australian Stock exchange. As we can see from the graph above that in July’14 Rio Tinto was trading at around AUD 65 and in Jan’16 it was trading at around AUD 39 so it is also a drop of about 40%.Now, we will look at Indian Steel Giant Tata Steel which has a lot of presence in Europe as well.metals and mining sector3Tata Steel is and Indian Iron and Steel Company which is listed at National stock Exchange. As we can see from the graph above that the stock was trading at about Rs. 520 in July’14 and hit a 5 year low of Rs.200 on 29 September’15 that is almost a drop of 61%.The main reason for such a disastrous performance in the mining and metal sector is that there is very less demand and the prices of all the metals had a free fall, now we will have a look at it as well.metals and mining sector4The Index was about 240 points in July’14 before reaching a peak of 265 in Sep’14 and hit a record 52 week low of 147.47 on 15 January’16, which is almost a fall of 48%. Arcelormittal the biggest producer of Steel in the world lost $ 8 Billion in 2015 the story is same with other metal producers like Glencore which also lost $ 8 Billion USD.metals and mining sector5As we can see from the NASDAQ Commodity lead Index was around 960 in July’14 as compared to only 730.78 on 15th January’16, down by almost 24%.metals and mining sector6The Index was around 900 in July’14 and 570 on 15 January’16 suggesting a drop of almost 37% hence we can conclude that Base metals actually have performed very badly.In India the situation even though not that bad, the industry has still not achieved its full potential mainly because of the government inefficiencies. Metal and Mining as a sector is highly regulated by the government, so there is less efficiency. Low reserve to production ratio indicates significantly unexplored area, limited fund for exploration, land acquisition, procedural delay, inadequate infrastructure, corruption and many social and religious reasons have stopped the industry from reaching its peak but with the new government in place the future looks positive.What has the Market done to correct itTo sum it up in one sentence we can say that the industry is plagued by chronic over capacity.Some of the measures taken are:-
  • US, EU and India has imposed anti-dumping duties on Chinese steel and Aluminum thus preventing any cheap metal from outside, and saving the domestic companies
  • EU has urged China to cut down production of Steel, China has announced plans to cut of production by 150 million tonnes over the next 5 years
  • Tangshan, the Chinese city that produces more steel than entire US put together, is set to host a 6 month long flower exhibition. Because of which there has to be a 50% reduction in emission that will directly impact production by (30 – 50 ) %
  • The US steel industry is expected to grow at 3% in 16-17 as opposed to 10.5 % contraction last year
Now if we look a little deep into the Indian market we will see that in near future there is huge growth scenario, some major factors are:-
  • The government has a target of 7.5% GDP growth, to achieve this government needs to boost up infrastructure, reduce gestation period of projects, and use all the resources efficiently.
  • The “Make in India” initiative will boost the manufacturing sector in the country, but if the mining industry is not able to keep up pace with the manufacturing sector then the final products manufacturers have to import raw materials, thus rendering them less competitive on the global sector.
  • With accommodative policy of the RBI and 100% FDI in the mining sector, there is a lot of availability of credit for these industries, FDI in defense sector will also help in boosting the metal market.
  • India needs to create 150 million non – farm jobs to remove poverty. Mineral-based areas which are also the most backward districts in the poorest state, can reap benefits if the metal and mining industry picks up. E.g. Angul district in Odisha, was one of the poorest district. Since coal mining started in the area poorest of poor segment in Angul decreased from 67% to 25% in a span of 10 years starting from 2002, the GDP per capita of Angul is Rs. 101,000 while of Odisha is Rs. 35000.So, we can clearly see that if mining can help Angul outperform Odisha it can definitely help India reduce poverty.
With these positive stimuli the Metal and Mining sector has shown some signs of recovery. So let’s have an in-depth look into the recovery process.

Inference-Metals and Mining Sector

We have seen that this sector is supposed to grow and it has hit the rock bottom in January’16 so now I will try to introduce you to the story what has happened after January 2016.metals and mining sector7Copper prices have increased over the past few months specially from the 15th Jan’16 lows ($ 1.94) and it hit it0s record high on 17th March’16 ($ 2.3) to its current price of $ 2.23 as on 19th April’16 ($ 2.22) showing an overall gain of about 15%.metals and mining sector8Lead Prices have also shown a positive trend with the soft metal rising from its lowest value of $1600 on 15th January’16 to around $1750 on 19th April’16 a rise of about 9.3 %.

metals and mining sector9

Iron ore seems to be the one that is riding the wave; with production reduction in china it has shown tremendous growth. From $40 to almost $60 Iron ore has gained almost 50% in the short duration of 5 months (1st Dec’15 – 19th Apr’16).

Recommendations-Metals and Mining Sector

So, we can safely conclude that the metal and mining sector which was badly hit by the slowdown is all set to recover. Even if we look at the Baltic Dry Index (Index of cost of transporting a set of major raw materials by sea), it had hit a rock bottom in Feb-March’16 is now recovering. This indicates that there were very less raw materials that were transported using seas in the Baltic region hence the prices went down. Now with the rise in the Index we can say that the requirement for the raw materials is increasing.

metals and mining sector10

It is a no-brainer to invest in some of the metals and mining companies and commodities, some ways in which we can actually make some money are :-
  • Investing in Vedanta Limited as is an interesting stock to bet upon it has a book value of INR 181.72 and adjusted book value of INR 115.16 but is trading at INR 103.7 (On 7th May’16) so this is another safe stock
  • We can invest in Iron ore and other base metals commodities
  • Baltic Dry index suggests that the shipping sector will have good buying opportunity as well.

-Report By Rahul Verma

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