Green Shoots for Metals?

Steve Fiscor

As mining companies were releasing their second quarter financials, it was becoming clear that some of the markets for several metals may be turning the corner. Prices for precious metals and iron ore had moved north. Gold miners have seen their market capitalization rise considerably since the beginning of the year. Other areas, especially bulk commodities such as coal, oil sands and potash, have yet to see a rebound.

Because of its ticker symbol (AA), Alcoa is always one of the first companies to discuss its earnings and in a way it sets the tone for industrial sectors. And they sent a very positive message. Discussing global demand for aluminum, the company said demand should grow by a “robust 5%” in 2016, while supply should only grow by 2.5%, leaving the market with a 775,000 metric ton (mt) deficit. In a world with negative interest rates, 5% is robust. They are also predicting a deficit for alumina (1.5 million mt).

Alcoa sees future demand for aluminum growing in two different areas: the aerospace and the automotive sectors. The company is predicting double digit growth from new jet engine launches in 2017 for the turbines, blades, rings, discs, structural castings, etc. Automotive demand for aluminum is expected to grow in North America, China and Western Europe. The U.S. will build 17.4 million cars in 2016, the most since 2000, and 60% of that market is light trucks, which have a high “aluminum intensity.” In fact, over the course of the next five years, Alcoa sees the amount of aluminum in a vehicle growing 77 lb to 470 lb from 393 lb today.

Alcoa is also the the No. 1 bauxite miner, producing 45.3 million mt, that’s more than 15% of total 290 million mt/y bauxite market. They recently announced the first bauxite shipment from Western Australia as a trial cargo to China. The company’s Juruti mine in Brazil will ship more than 1 million mt/y of bauxite to China in 2016. Before the end of the year, they plan to spin off the bauxite mining segment, a move that has thus far been well-recieved by investors.

Copper prices today are much lower than they were one year ago, $2.18/lb vs. $2.71/lb. Since the beginning of the year, prices have improved by 5%. The red metal, however, has a very compelling medium- and long-term outlook. Freeport- McMoRan discussed this in their second quarter call. This year the company’s $4.5 billion Cerro Verde expansion, the largest processing facility in the history of mining, will reach full capacity. During the second quarter the new Cerro Verde mill processed 352,000 mt/d and produced 270 million lb of copper compared to the previous rate of 116,000 mt/d and 97 million lb of copper.

Discussing copper fundamentals, the company said that even with the new supplies coming onto the market, fewer disruptions and lower growth in China, they see modest growth in copper demand for the medium- and long-term. Currently there are ample supplies of copper, but not an overwhelming amount. Today’s existing mines, however, will produce less as time passes due to declining grades. Over the next 10 years, the total copper supply (approximately 20 million mt today) will decline by 20% or 4 million mt. While there is still plenty of pain in the mining business, some green shoots are beginning to sprout through the scorched earth. The good news is that many of the mines operating today have the ability to bring more production to the market through brownfield expansions.

Steve Fiscor, Editor-in-Chief, E&MJ

As featured in Womp 2016 Vol 08 -