Metals and Mining: Blast Off!

A mere one day after I mention that SPDR Metals and Mining ETF (XME) at 39.96 could be cheap, the entire metals sector goes wild and rockets up 5.23% in a single day!

Big drivers for the sudden jump metal stocks include bullish comments about United States Steel Corp. (X) and talk of a takeover of Corus Group (CGA) by Tata Steel. Excitement about steel spread to Nucor Corp. (NUE), AK Steel Holding Corp. (AKS) which may successfully deunionize once of its plants, and Reliance Steel & Aluminum (RS) all going up about 5.5% each. Bullish comments about copper demand (staying high) and future prices (not getting cheaper) from Morgan Stanley pushed Phelps Dodge Corp. (PD) and other copper miners up.

The rally wasn't just limited to the big famous names either. Fairly obscure names such as Carpenter Technology Corp. (CRS) as well as Platinum/Palladium miner Stillwater Mining Company (SWC) were also up strongly. Pretty much every single name in the SPDR Metals and Mining ETF was up 5% today. The metals rally even spread to the gold miners with the Market Vectors Gold Miners ETF (GDX) up 2.19% for the day.

As this chart of five days trading of the iShares Goldman Sachs Natural Resource ETF (IGE), SPDR Oil & Gas Exploration & Production ETF (XOP), Gold Miners (GDX) and Metals and Mining ETF (XME) demonstrates, all natural resources are not alike, and energy is not the entire story.

Comments

[kkin365]

good update. Is there anyway that charts may be magnified? omooc

[Daniel Brawdy]

Metals and miners are not created equal. While the long term supply/demand for some metals might remain, lower energy prices will be more than offset by increasing labor costs as labor looks to get a piece of the action (as the recent strikes show). Moreover, the housing slump in the U.S. is going to kill demand for copper (whose demand is principally driven by residential construction). Moreover, China is actively working to cool the red hot construction market not only with monetary policy but by firing regional govenors who fail to slow projects.

The 1-2 punch of increasing labor costs and slumping demand is going to drive companies like PD and PCU with 50% exposure to the U.S. market well below current levels.

Commodities bulls are buying all metals and miners alike - just based on news of OPEC cutting oil supply - but we are now entering a phase of differentiation between margins and markets, miners and metals. There are some great long/short trades to be made by differentiating the propects of individual companies and markets against the backdrop of hedge funds who are all buying and selling the whole commodities stack en masse.