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Inco Limited (N) announced that earnings prospects for their current second quarter and remainder of the year will be strong. Inco announced that it expects second quarter earnings will be the highest quarterly number in its history. As metals stocks have sold off over the past 2 months, this announcement raises the question, "Is this isolated good news or will it be industry wide?"
Much of the focus in recent months has been on gold and silver, which have increased over 30% this year. Much of the demand for gold and silver can be traced to ongoing geopolitical tensions and inflation concerns. In a stealth manner, similar increases have been produced by the lesser known base metals; copper, aluminum, zinc and nickel.
The announcement by Inco has shed some light into the prospect that base metal demand is strong and the second half is looking quite strong despite the expectations that the US economy is slowing.
First, Inco announced that it expects to meet or exceed guidance that it provided as recently as April 2006 for the 2nd quarter for production of nickel, copper and platinum and is raising its guidance for nickel production for the full year by an additional 2% to 575 million pounds.
This upped production is coupled with a forecast that nickel in 2006 will have a supply deficit of up to 30,000 tonnes, putting further upward pressure on prices.
Industry-wide demand is being helped by increases in the repair and rebuilding of bridges, roads and other infrastructure in developed and emerging nations. The headlines typically have assigned this growth to China's gargantuan appetite for natural resources. Less focus is placed on the burgeoning economies of India, Brazil and Russia. Also playing an important part for this surge in demand is oil, or more specifically, the increased capital expenditures for drilling of new oil and gas fields. Base metals are used in much of the pipe, drill bits and other equipment used by E&P companies.
The majority of growth for base metals companies, however, will come as a result of under-investment in mines, and plant and equipment over the past 25 years that has resulted in smelting bottlenecks and dwindling inventories of base metals.
Copper: Copper recently surged past $3.65/lb, up from its 2005 price of $1.67 and well above its long-term average price of $0.82/lb. China and the U.S. remain the largest consumers of the commodity, and copper demand from technology and housing has dropped inventories in recent weeks.
Aluminum: Aluminum prices have risen to $1.35/lb, its highest level since 1988 and well above its long-term average of $0.68/lb. Prices will be supported for the next 6-12 months as supply deficits are expected.
Zinc: Zinc has hit a historic peak price of $1.80/lb. This is well above its long-term average of $0.45/lb. The current price structure is strongly supported by a 6% decline in May inventories. Currently, there remains about 10 days of consumption left in inventory.
Nickel: Nickel has risen to $9/lb nearly triple its long term average of $3.25/lb. Prices are well supported as new production is limited while demand has increased for use in the steel making process. This is coupled with some untimely shutdowns of mines and smelters and the threat of a labor dispute later this year that may further crimp supply.
Prevalent current thinking is that these prices will decrease demand and revert back closer to their long term averages. The probability that this occurs is unsupported by global economic trends that remain on the upswing. Given the economic outlook and strong demand, pricing and earnings of base metal companies may provide positive earnings surprises to investors.
Cash flows may follow similar patterns that the energy companies have experienced as earnings rocketed as a result of leverage to the commodity. This rise in cash flow may show an increase of share repurchases and dividend increases, or one-time payouts. It may also increase the prospects of merger and acquisitions of base metal companies as inventories are tight and metals are being viewed similarly to oil as a point of national security.
Much of the focus in recent months has been on gold and silver, which have increased over 30% this year. Much of the demand for gold and silver can be traced to ongoing geopolitical tensions and inflation concerns. In a stealth manner, similar increases have been produced by the lesser known base metals; copper, aluminum, zinc and nickel.
The announcement by Inco has shed some light into the prospect that base metal demand is strong and the second half is looking quite strong despite the expectations that the US economy is slowing.
First, Inco announced that it expects to meet or exceed guidance that it provided as recently as April 2006 for the 2nd quarter for production of nickel, copper and platinum and is raising its guidance for nickel production for the full year by an additional 2% to 575 million pounds.
This upped production is coupled with a forecast that nickel in 2006 will have a supply deficit of up to 30,000 tonnes, putting further upward pressure on prices.
Industry-wide demand is being helped by increases in the repair and rebuilding of bridges, roads and other infrastructure in developed and emerging nations. The headlines typically have assigned this growth to China's gargantuan appetite for natural resources. Less focus is placed on the burgeoning economies of India, Brazil and Russia. Also playing an important part for this surge in demand is oil, or more specifically, the increased capital expenditures for drilling of new oil and gas fields. Base metals are used in much of the pipe, drill bits and other equipment used by E&P companies.
The majority of growth for base metals companies, however, will come as a result of under-investment in mines, and plant and equipment over the past 25 years that has resulted in smelting bottlenecks and dwindling inventories of base metals.
Aluminum: Aluminum prices have risen to $1.35/lb, its highest level since 1988 and well above its long-term average of $0.68/lb. Prices will be supported for the next 6-12 months as supply deficits are expected.
Zinc: Zinc has hit a historic peak price of $1.80/lb. This is well above its long-term average of $0.45/lb. The current price structure is strongly supported by a 6% decline in May inventories. Currently, there remains about 10 days of consumption left in inventory.
Nickel: Nickel has risen to $9/lb nearly triple its long term average of $3.25/lb. Prices are well supported as new production is limited while demand has increased for use in the steel making process. This is coupled with some untimely shutdowns of mines and smelters and the threat of a labor dispute later this year that may further crimp supply.
Prevalent current thinking is that these prices will decrease demand and revert back closer to their long term averages. The probability that this occurs is unsupported by global economic trends that remain on the upswing. Given the economic outlook and strong demand, pricing and earnings of base metal companies may provide positive earnings surprises to investors.
Cash flows may follow similar patterns that the energy companies have experienced as earnings rocketed as a result of leverage to the commodity. This rise in cash flow may show an increase of share repurchases and dividend increases, or one-time payouts. It may also increase the prospects of merger and acquisitions of base metal companies as inventories are tight and metals are being viewed similarly to oil as a point of national security.
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