As the global economy recovers, RBC Capital analysts expect industrial metals prices to remain high this year, especially as economic strength in China underpins demand. President Joe Biden’s infrastructure plan should also give industrial metals a boost this year.
In a recent note, RBC analysts pointed out that industrial metals have pulled back from recent highs, but they believe the backdrop remains positive. They also expect a free cash flow inflection this year. Rising yields and a stronger U.S. dollar have deflated the macro push higher, but the RBC team believes underlying fundamentals remain strong.
They expect copper prices to be driven by demand as they look for inventories to remain below the critical level through 2026. RBC sees a price of $3.65 per pound for copper at the end of this year. They note that annual copper consumption has grown at an average of 2.5% over the last 40 years. RBC’s base case assumes 2.3% growth through 2030, and their upside case now shows potential demand at 3%.
Steel Prices Will Also Keep Rising
Steel demand is also likely to remain strong, driven by demand from China and infrastructure spending in the U.S.
Iron ore has also been doing well, given that it’s used to make steel. Iron ore gained almost 4% to $166.55 per dry metric ton, although it declined the next week slightly. According to RNC, blast furnace utilization in China grew to 84% recently from 82.9% the week before. Steelmakers outside Tangshan increased their utilization to capture lost production from Tangshan.
Chinese steel prices climbed on strong demand as Chinese steel industries decline. In North America, steel prices have been rallying since August 2020 due to recovering demand, and the metal is now at all-time highs. According to RBC, supply hasn’t returned at the same pace to balance the market. Inventories have been drawn down this past year amid uncertainty around the recovery timeline, which has created an extremely tight market for steel and long lead times at mills.
As the economy continues to reopen and infrastructure spending helps accelerate the recovery, RBC expects demand for steel to remain strong. They noted that U.S. crude steel production and utilization appears to be plateauing and could tighten further due to maintenance shutdowns in the spring and summer.
Metals and Mining Stocks Could Benefit From Infrastructure Plans
Many metals and mining companies should benefit from the increased infrastructure spending in the coming years. One big beneficiary could be Vale SA (NYSE:VALE), one of the world’s leading iron ore miners. It’s in a three-way race with Rio Tinto (NYSE:RIO) and BHP Group Ltd (NYSE:BHP), and all three companies could benefit from soaring steel prices and the infrastructure plan. Vale is also one of the world’s top nickel miners and produces gold, silver, copper and other metals.
Steel companies should also benefit from infrastructure spending. Nucor Corporation (NYSE:NUE) is North America’s largest domestic steelmaker, and the Biden administration has signaled a preference for buying from American companies. Even without the increased infrastructure spending, Nucor has been doing well, preannouncing that it expected its first-quarter earnings to set a new company record.
Freeport-McMoRan Inc (NYSE:FCX) is one of the world’s leading producers of copper, which is essential when it comes to building and construction. Copper is used in everything from electrical wiring to plumbing, and it’s virtually impossible to build anything without it. Freeport-McMoRan has been rallying on expectations for the infrastructure bill, and there’s even more to the story. Biden’s plan focuses on green energy, and copper plays a major role in that as well. For example, electric vehicles use quadruple the amount of copper as traditional vehicles do. Renewable energy infrastructure also uses a lot of copper.
The list of metals and mining stocks that could benefit from increased infrastructure spending is quite long and includes many more names like Commercial Metals (NYSE:CMC), Reliance Steel and Aluminum (NYSE:RS), Schnitzer Steel (NASDAQ:SCHN), Olympic Steel (NASDAQ:ZEUS) and Steel Dynamics (NASDAQ:STLD).
Other Stocks That Could Win Thanks to Infrastructure Spending
Metals and mining stocks aren’t the only ones that will benefit from infrastructure spending. The companies that build all that infrastructure are going to need equipment and lots of it. Caterpillar Inc. (NYSE:CAT) could be a prime beneficiary of all those equipment needs. The company’s stock has more than doubled since its March 2020 lows after years of range-bound trading, so it’s already been shifting higher even before the announcement about the infrastructure plan.
Companies that handle construction materials should also win, like Vulcan Materials Company (NYSE:VMC). The company is the largest producer of construction aggregates like stone, sand and gravel in the U.S. It also produces asphalt and cement.
If you’re not sure which infrastructure stocks to buy, but you’d still like to get a piece of the industry, you could tap into one or two exchange-traded funds to get a broader view of it. The iShares U.S. Infrastructure ETF (BATS:IFRA) has climbed in five of the last six months and 10 of the last 12 months. The top two holdings are Kansas City Southern (NYSE:KSU) and Hawaiian Electric Industries (NYSE:HE). The only thing to keep in mind with this ETF is that it holds a lot of energy and utility companies, which might not be quite what you were thinking of. Still, these companies should benefit from growth in their respective industries.
The Global X U.S. Infrastructure Development ETF (BATS:PAVE) could also benefit from the infrastructure spending plan. More than 60% of the fund’s holdings are industrials, while more than 20% are in the materials sector. Its top holdings include equipment manufacturer Deere & Company (NYSE:DE), Parker-Hannifin Corp (NYSE:PH), Eaton Corporation PLC (NYSE:ETN), Norfolk Southern Corp. (NYSE:NSC), Kansas City Southern, Sempra Energy, Emerson Electric Co. (NYSE:EMR) and Trane Technologies PLC (NYSE:TT).
As you can see, there are plenty of ways to play the infrastructure spending bill, and rallying industrial metals prices show that most of these stocks will be heading up, up and away.
Michelle does not have a position in any of the stocks mentioned in this article.
Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.