What’s weighing on industrial metal stocks?

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 recovery in construction, the industry still remains saddled by a number of headwinds. Below, we discus some of the key reasons and what investors in the industrial metals sector can look forward to in the coming months as well as over the long term:

Threat of Oversupply Looms Large

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 Ltd. (FMG.AX), have ramped up production. They intend to continue exploring for iron ore in Australia despite lower growth forecasts from China and weaker iron ore prices, betting on continued strength in iron ore demand over the long term. Hence, Australia, the world's top exporter of iron ore, will rev up its shipments.

Australia cut its iron ore price estimate for 2015 by 33% as the surging output will overwhelm Chinese demand growth, leading to a supply glut. Iron exports from Brazil, the second largest exporter, have risen as a result of Vale increasing its production. Vale, which alone contributes almost 85% of Brazil’s iron ore, will continue to increase its iron output.

In case this excess supply is not matched by adequate demand, it will expose the market to a risk of further price declines.

Recently, BHP Billiton decided to put the brakes on its planned boost to iron ore production, becoming the first top miner to act on the matter of global supply glut that has sent prices for the commodity reeling. It announced that it is pushing out its $2 billion Port Hedland expansion. It would have increased the miner’s output by 20 million tons. The move will slow BHP’s planned production boost to 290 million tonnes a year by mid-2017 but would enable its proposed 20 million-ton-a-year expansion to be executed at lower costs.

The market took this as a sign that the top producers may begin to tackle oversupply which this year, which is expected to reach 90 million tons and only dip to around 80 million tons in 2016, the third consecutive year of excess production. The industry was also encouraged by the fact that export growth from Australia is showing signs of slowing.

Despite the announcement, BHP said it produced 59 million tons of iron ore in the three months through March, up one-fifth year over year. The company lifted its output forecast for the year through June, saying it now expects to log 230-million tons in output, 2% more than its earlier projection.

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