Industrial metals are the building blocks of an economy. Remember, Alcoa Inc. (AA) symbolically kick-starts the earnings season every quarter. At present, even though concerns over China’s future growth have added an element of uncertainly to the outlook, there are plenty of reasons to be optimistic about the industrial metals industry over the long term.
 
Here we discuss some of the key reasons and what investors in the industrial metals sector can look forward to in the coming months and years:

Strong Demand in Automotive & Aerospace

On the demand side, aluminum consumption is expected to improve on a global basis, spurred by the automotive and packaging industries, the key end-markets. The automobile market is becoming increasingly aluminum-intensive, given the metal's recyclability and light-weight properties. Automakers consumed a record amount of aluminum last year as plummeting prices and technological breakthroughs made it a viable alternative to steel.
 
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. In line with this, Alcoa has completed an expansion at its Tennessee facility dedicated to supplying aluminum sheet to automakers like Ford Motor Co. (F), General Motors Company (GM) and Fiat Chrysler Automobiles N.V. (FCAU).
 
The airline industry is also expected to boost demand for the metal. Alcoa recently clinched two multi-year supply contracts with The Boeing Company (BA) worth more than $2.5 billion. Under one contract, which is Alcoa's largest fastener deal ever, the company will supply multi-material fastening systems for every Boeing platform including 777X and 787 Dreamliner.

Under the second deal, Alcoa will supply ready-to-install titanium seat track assemblies for the entire 787 Dreamliner family of airplanes. The agreements build on Alcoa's 2014 aluminum sheet and plate deal with Boeing worth more than $1 billion. With that landmark deal, Alcoa became Boeing’s sole supplier of wing skins on all of its metallic structure airplanes.
 
Alcoa also has big aerospace deals with Airbus and Lockheed Martin Corporation (LMT), both inked in Oct 2015. Alcoa cut a $1 billion deal with the French aircraft manufacturer Airbus to supply titanium, steel and nickel-based superalloy aerospace fastening systems. Alcoa also won a contract worth roughly $1.1 billion to supply titanium for Lockheed Martin’s F-35 Joint Strike Fighter (“JSF”) program. The contract makes Alcoa the titanium supplier for airframe structures for all three variants of the F-35 from 2016 through 2024.
 
To capitalize on the lucrative aerospace market, Alcoa acquired RTI International, which broadened its titanium offerings and added advanced technologies and materials to its portfolio. Moreover, the buyout of U.K.-based leading jet engine components maker Firth Rixson has placed Alcoa to capture additional growth in the growing aerospace market through a broad spectrum of high-growth, value-add jet engine components.

In addition, the acquisition of Germany-based leading provider of titanium and aluminum structural castings – Tital – has strengthened Alcoa’s position to leverage strong growth in the commercial aerospace sector and capture rising demand for advanced jet engine components made of titanium.
 
Following China, which accounts for over 40% of the global aluminum consumption, India holds promise given its current low level of aluminum consumption and high urban population growth. With demand being strong and the industry pulling the reins on supply, the aluminum market is likely to witness supply deficits for a prolonged period, thereby creating a supportive backdrop for high aluminum prices.
 
Pickup in Economic Activity to Drive Copper Demand
 
Copper is a major industrial metal playing a particularly important role in emerging countries. Given its varied applications, the trends in the copper market are often considered useful indicators of the state of the global economy.

Developments in the world economy are strongly correlated with movements in copper prices. Trends in Chinese GDP growth and world trade play a major role. Given that China accounts for the largest share of global copper consumption (around 46%) by far, and also has a large share in the total production of pure copper (around 34%), correlation of the metal with China is a key factor.

The near-term outlook for China has been an overriding concern for the global markets and the situation isn’t expected to stabilize in the near term. But in the long run, expectations of a rising middle class in Asia, particularly in India and China, who will spend more on consumer goods such as air conditioners and refrigerators in the years to come, will spur demand for copper. Rio Tinto plc (RIO) and BHP Billiton Ltd. (BHP) are planning to mine millions of additional tons of copper, despite the threat of an oversupplied market for the next few years.
 
The economic outlook for 2015 is upbeat for the U.S. while the European economy is recovering slowly on the back of stimulus. In China, the authorities renewed their pledge to arrest the decline in the economy and stimulate growth. Overall, as the global economic scenario improves, copper as well as other industrial metals will move in tandem.

Rebound in Construction
 
The housing and construction sector is the largest consumer of steel today and consequently of iron ore. Building construction (pipes and wires) is also the largest market for copper. An uptrend has been noticed in real estate activity, like new home starts and construction spends, in the U.S. over the past few quarters.

The U.S. Architecture Billings Index (ABI), an economic indicator that provides an approximately nine-to-twelve-month glimpse into the future of non-residential construction spending activity, is reflecting healthy and sustained demand for design services in nearly all non-residential project types. The American Institute of Architects (AIA) has remained above 50 for most part of 2015, which indicates an increase in billings.

Long-stalled construction projects are being renewed. Moreover, easier access to credit from lending institutions along with an increasing comfort level in the overall economy has helped revitalize the commercial real estate sector in recent months. Requirement for emerging projects, such as education facilities and government buildings, is also creating demand in the sector.

In the long term, as the urban population increases worldwide, so will the need for steel to build skyscrapers and public-transport infrastructure. Emerging economies will also continue to be major demand drivers to support increasing urbanization and industrialization. The demand for iron ore is thus expected to remain strong in the years to come. Hence, a rebound in construction bodes well for the iron ore and copper industries.

Rectifying the Aluminum Demand-Supply Imbalance

After aluminum prices bore the brunt of chronic surplus, the global aluminum industry went underwent substantial changes to correct the supply-demand picture. This will eventually lead to firm prices. The world’s second largest aluminum producer, RUSAL’s production fell 7% year on year to a record low of 3.6 million metric tons in 2014 as the company reduced production at seven smelters during the year in an attempt to improve the global supply and demand balance. RUSAL is considering further aluminium capacity production cuts of some 200,000 tons in 2015.
 
Likewise, Alcoa undertook a number of restructuring measures (including closure of smelters) in the past two years and is aggressively pursuing cost-cutting actions. Alcoa plans to curtail 373,000 metric tons of smelting capacity in the U.S. Alcoa has been aggressively reshaping its Upstream portfolio as part of a successful multi-year strategy to position itself as a low-cost global leader in alumina and aluminum production. The company is on track to meet its 38th percentile target on the global aluminum cash cost curve in 2016.

Bottom Line
 
As you can see, there is no reason for not being optimistic about the industrial metals industry over the long haul. But what about investing in the space right now?

Check out our latest Industrial Metals Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is shaping up for this sector going forward.

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