Sector Overlook: Diversified Metals & Mining

S&P’s outlook for diversified metals and mining industry :

Our fundamental outlook for the diversified metals & mining sub-industry (in which copper companies dominate) for 2009 is negative, as we believe sales and earnings will decline in 2009 from 2008 levels.

Our expectation reflects our view that the price of aluminum, copper, nickel, zinc, iron ore and coking coal will decline, due mostly to lower demand and oversupply.

Based on the S&P forecast for global GDP growth of 0.2% in 2009, versus estimated global GDP growth of 2.5% in 2008, we believe that global demand for base metals will decline from 2008 levels. For example, we expect that global copper demand in 2009 will likely decline by 2%, versus flat demand in 2008. In our view, demand from the U.S. (the world’s second largest consumer) will decrease again in 2009 on an expected 2.0% drop in total construction and a 19.2% decrease in homebuilding. Moreover, we think that demand growth in China (the world’s largest consumer) will be up just 1% in 2009, versus 2008’s estimated growth of 3%. Partly offsetting the forecasted decline in demand, mine production of copper should be lower in 2009 due to production cuts in Chile. Through October 2008, mine production of copper was down 1.3% year to date. For 2009, we look for an average copper price of $1.50 a pound, versus an estimated average copper price of $3.10 in 2008.

Longer term, we believe that secular demand for copper and other base metals will increase. In our view, the industrialization of China and India will lead to greater demand. At the same time, we believe production of copper and other base metals will increase less rapidly than demand, as output at existing mines is exhausted and fewer new mines come into production. Consequently, we think that the copper price at the next trough will be higher than the $0.71 of 2002. Also, the next market peak should result in copper prices reaching a higher average level than the average price seen in 2007.

Year to date through January 9, the S&P Diversified Metals & Mining Index rose 14.2%, versus a 1.6% decline in the S&P 1500 Composite Index and a 2.3% rise in the S&P Materials Index. In 2008, the sub-industry index fell 75%, while the S&P 1500 declined 38.2% and the S&P Materials Index decreased 46.8%.