In 2013, iron had an overall good run compared to other base metals as prices and demand remained relatively strong. Ramp up in production by the major iron ore producers, increase in exports from Australia, Brazil and India will lead to a glut in iron supply in 2014. In case this excess supply is not matched by adequate demand, it will expose the market to the risk of a decline in prices.
The fate of iron ore prices now mainly hinges on Chinese demand. A rebound in China’s metal imports along with improvement in global manufacturing will push iron ore prices upward. Furthermore, iron ore prices will be supported by increased demand from steel markets in India, Japan and South Korea.
However, aluminum and copper did not enjoy a similar fate in 2013. As supply outpaced demand, aluminum prices slid downhill and recorded the lowest in November. Until the market can work its way out of the oversupply, aluminum producers will continue to face the brunt in the form of low prices. Furthermore, input costs are expected to pose challenges for the industry.
In the medium to long term, aluminum consumption is expected to improve on a global basis driven by the automotive and packaging industries. The automobile market is becoming increasingly aluminum-intensive and the global push to improve fuel efficiency in vehicles is expected to more than double the demand for aluminum in the auto industry by 2025. (Read: How will the Shipping ETF Sail in 2014)
For most part of 2013, oversupply and lack of demand kept copper prices in check. The scenario will continue in 2014 with demand and supply imbalances. Notwithstanding the current volatility in prices, we have a long-term bullish stance on copper, supported by its widespread use, limited supplies from existing mines and the absence of significant new development projects. Prices will be influenced by demand from China and emerging markets, economic activity in the U.S. and other industrialized countries.
Thus, in the metals market on the whole, increased supply and insufficient demand will continue to exert a downward pricing pressure on commodities over the short term. However, growth in the U.S. and an improving global macroeconomic scenario in tandem will boost demand in the industry. The long-term story for the industry remains intact as growth in the emerging markets, particularly in China and India, will be a major driver of metals demand.
ETFs to Tap the Sector
An ETF approach can help spread out assets among a variety of companies and reduce company-specific risk at a very low cost. There are currently two ETFs available to play this sector.
SPDR S&P Metals & Mining (NYSEARCA:XME)
Launched in Jun 2006, XME seeks to replicate the S&P Metals and Mining Select Industry Index.