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Metals And Mining ETFs
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About Metals And Mining ETFs |
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Natural Resources (Metals and Mining) ETFs Overview and forecast
Metals and Mining ETFs have been riding some wild waves throughout the commodities boom. The mining sector and the commodities markets are the big forces behind this index, and in anyone's terms, they're savage places to do business. The rise of China has been fueling the boom, and the Chinese have been actively acquiring mining companies and mines around the world.
The Chinese market and China's razor sharp production margins have also been having a major effect on metals and mining markets. Prices for copper, iron, tin, zinc, and other basics were rising steadily until the economic meltdown of 2008. Big swings in spot metal prices were instantly reflected in the metal and mining stocks.
Because of China's huge construction and industrial production booms, the demand for mining products was at all time highs, and stock prices were also in boom mode. So the Metals and Mining ETFs were also naturally at top prices. That situation changed rather drastically. Their prices, over the 12 month period to April 2009, show huge drops of over 60% in some cases.
That, however, is a slightly simplistic view of the index. The demand for metals was seriously affected, obviously, but the Metals and Mining ETFs aren't homogenous. They can be quite diverse, some geared to small speculative miners, some to gold, some to major league miners, and even ETFs in the same index can have quite different mixes of assets.
There are real complexities involved in assessing the mining ETFs, and the likely moves of the sector. The mining boom was a true boom, not a speculative boom. China made a big difference, in that production and prices were struggling to keep up with demand. The miners were doing real business. The metals prices, unlike other booms, weren't overvalued. The Chinese, quite the contrary, working on very tight margins, made a point of keeping their costs down, and prices workable.
So it's fair to say that the mining stocks weren't overpriced by definition, unlike the horribly familiar boom scenarios in other sectors. The Metals and Mining ETFs only emerged relatively recently, at the peak of the market, and reflected the boom scenario. They therefore got truly hammered when the markets collapsed.
Short term (2 months)
The mining industry is one of the tougher industries to pin down to a trend. It can jump, quite unexpectedly, based on day trading and spot metal prices. Overall, it's reasonable to say that the sector is tracking the economic situation to a large extent. The Metals and Mining ETFs can be expected to move, sometimes suddenly, on the back of corporate situations, prices, and new business. The mining industry is notorious for ephemeral moves, and it's advisable to remember that Metals and Mining ETFs are subject to the nature of the markets.
Medium term (2 years)
If the rumor mill is a problem in the mining sector, the real business is anything but ephemeral. Millions of tons of metal, and tens of billions of dollars, are exchanged yearly. Analysis of mining companies is an art, as much as a science. The mining giants are truly huge companies, major weights in their indices, and they form an important part of investment portfolios. They are therefore "solid" investments, in that sense of the word.
In two years, Metals and Mining ETFs can be expected to have recovered to a significant extent. The mining industry always comes out of recession strongly, as industrial demand picks up. The main question for investors is whether the individual Metals and Mining ETFs contain significant upside, (see Qualifier, below) and whether the mix is well weighted to a healthy recovery.
Long term (5 years)
Unlike other sectors, the mining sector is a lot easier to predict, long term. Any economic recovery will effectively restart the industry. China, in particular, is currently working on maintaining its current Five Year Plan, and sticking to a defined level of economic growth. There will be a demand generated to restart the economic growth from this all important Chinese market.
China also has a strategy of sovereign wealth investment, which is already taking over major mining assets from miners trying to rid themselves of debt. That means buying equity, and the "Chinese investment rumor" is the current magic wand for mining stocks.
China's not the only country likely to be buying up mining assets. The big miners are more than likely to snap up opportunities, too, and many of the smaller mining companies may disappear. That will affect Metals and Mining ETFs, directly, as their mix of holdings is revised.
Qualifiers to projections
If you don't know the mining industry, you need to learn your way around the market. The mining industry, by any definition, contains risks. Speculative stocks, commodity prices, corporate debt, and very dubious quality information about these things, make investment a matter of expertise. It is not advisable to invest in mining until basic understanding of the sector and its various risks is properly understood.
For example: The Metals and Mining ETFs and their related indices are based on companies which are quite unlike "normal" industrial stocks. Precious metals producers and base metals producers work in totally different markets. The market reacts to spot metal prices, when most miners in fact work on contract prices. Contract prices, however, react to spot prices, over time. Miners and their customers try to buy and sell at good average prices.
Even the prices of big miners can be drastically reduced, and Metals and Mining ETFs can be expected to contain built in volatility. This level of volatility is even tough on day traders, let alone long term investors.
The available ETFs on the market are another problem. The Metals and Mining ETFs could be criticized for lack of depth in their present form. They reflect part of the sector, but the major indices aren't too well represented. That makes it harder to figure out the moves of the indices. The mixes of holdings are balanced, but that's an acquired taste among investors, when it's recognized that the big miners can generate considerable value in a daily session.
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Last Updated on: 2010-01-14 02:03:40 |
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