Mining Industry (Ferrous & Non Ferrous) Outlook: Factors including population growth, urbanization in the Asian countries and the increasing requirements of the developed countries have led to increased demand for minerals and metals. The metals & mining industry addresses this ever-rising demand. The metal industry is divided into two broad parts: ferrous (steel, iron and alloys of iron ) and non-ferrous (metals that do not contain an appreciable amount of iron such as aluminum, copper, lead, nickel, tin, titanium and zinc, and alloys like brass). (Read: 3 ETF Winners from No Taper Shocker)
The Mining-Ferrous & Non Ferrous industry has historically been highly cyclical and is highly susceptible to economic conditions. This is particularly due to the cyclical nature of its main customers: the automotive, construction, machinery and equipment industries. The industry has been facing challenges off late due to fall in commodity prices. Lingering Euro-zone sovereign debt crisis, economic stagnation or slow growth in developed economies and a cooling of emerging market economies have taken a toll on the industry.
To maintain their margins in the falling commodity prices scenario, mining companies have stayed afloat by curtailing production, aggressively cutting costs, and abandoning or postponing expansion plans. These companies are reviewing their portfolios to identify underperforming assets and shut down or divest these high cost and non-core assets. Industry consolidation, automation technology, owner-operated mines and investment in energy assets are some steps that the companies are taking to mitigate the impact of rising costs.
Cost inflation in the sector is expected to remain a headwind for metal and mining companies over the next several years, driven by a number of factors viz. labor, energy, ore grades, currencies, supply constraints and taxes. Persistent recessionary conditions in Europe will have residual effects in other parts of globe. This synchronized global economic slowdown is the biggest headwind for the metals space at present.
However, the long-term picture remains a lot more promising for the mining industry on the back of ongoing industrialization in China, India and in other developing economies. Growth in the United States will be supported by strong momentum in the auto sector and recovery in construction markets. The auto sector will not only trigger demand for steel but will also boost demand for aluminum as the automobile market is becoming increasingly aluminum-intensive, benefiting from its recyclability and light-weight properties. However, the Euro-zone crisis remains an overhang.
ETFs to Tap the Sector
An ETF approach can help to 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. (See: All Materials ETFs)
SPDR S&P Metals & Mining (XME)
Launched in Jun 2006, XME seeks to replicate the S&P Metals and Mining Select Industry Index. The S&P Metals & Mining Select Industry Index represents the metals and mining sub-industry portion of the S&P Total Market Index.
With AUM of $619 million, XME is the largest and most popular fund in the metals and mining space. It has a trading volume of roughly 3.3 million shares a day, suggesting little or no extra cost in the form of bid/ask spreads. The ETF is a low-cost choice, charging a net expense ratio of 35 basis points a year, while the dividend yield is 1.67% currently.
The fund currently holds 40 stocks in its basket, with a concentrated focus on small caps with large caps making up about 9% of assets. It puts only 33.8% of assets in the top 10 holdings with weightage of around 3% each. From a commodities perspective, the product is heavily weighted toward steel with 36% sector weightage, followed by diversified metal and mining (21%), coal and consumable fuels (17%), precious metals (11%), gold (8%), and aluminum (7%).