The mining industry performed well in the second half of 2016 with many major mining stocks surging to highs not seen since mid-2015. This can be attributed to the solid rally experienced by many commodities, including metals and coal, which surged because of a sharp increase in demand from China. There are signs that 2017 will also be another solid year for miners, and they will continue to benefit from higher commodities prices.
Now what?
Firstly, demand for metals remains strong.
One of the biggest beneficiaries of the commodities rally was zinc, which soared to a five-year high over the course of the year. Another was steel-making coal, which multiplied six-fold because of decreasing global supply and a marked spike in demand from China.
Now it’s copper’s turn to rally.
Even Goldman Sachs, which had taken a long-term pessimistic view of the outlook for copper, has recently become more upbeat concerning the orange metal. Goldman believes that copper will continue to rise through the first half of 2017 because of the uptick in industrial activity.
Furthermore, the much-anticipated growth in copper supplies has yet to eventuate, meaning that as demand grows because of an uptick in construction and industrial activity, prices will continue to rise. This certainly bodes well for copper miners such as Teck Resources Ltd. (TSX:TECK.B)(NYSE:TECK) and First Quantum Minerals Limited (TSX:FM).
Secondly, Trump’s fiscal stimulus bodes well for higher commodities prices.
Another important driver of higher commodities prices, particularly metals and steel-making coal, is Trump’s planned fiscal stimulus and trillion-dollar investment in infrastructure.
You see, zinc, steel and copper are all important elements used in a range of construction activities, and as the investment in infrastructure progresses, the level of construction activity will rise.
Finally, commodity supplies will fail to keep pace with demand.
The prolonged slump in commodities saw miners curb investments in exploration and mine development as they battled to survive the worst downturn since the global financial crisis.
As a result, there has been a dearth of investments in the production of many commodities, particularly coal, copper, and other base metals. Given the long lead times required to bring new projects online, along with China curbing the production of a number of commodities including coal, analysts expect that supply constraints will support higher prices over the course of 2017.
So what?
Each of these factors will support metals and steel-making coal prices over the course of 2017, giving the earnings of miners a healthy bump. This means that cash flows will continue to grow over the course of the year, and miners like Teck will be able to reduce debt and even consider rewarding shareholders by boosting their dividends.
Nonetheless, investors shouldn’t expect miners to perform as strongly as the rally experienced in the second half of 2016. This rally saw Teck’s share price rise more than fourfold over the last year and First Quantum’s spike by more than 555% for that period.
