The 'Elusive' Bottom Might Still Not Be In For Metals & Mining Names

In a new report, Morgan Stanley analyst Paretosh Misra updates the firm’s outlook for metals and mining stocks. Morgan Stanley has once again significantly lowered its price target expectations for the group, but remains bullish on a pair of names at current prices.

Finding the bottom
According to Misra, the optimism seen in the first half of the year about a late-year resurgence in metal prices has faded in recent weeks. Morgan Stanley sees three main factors continuing to weigh on metal prices: a declining cost curve, Chinese demand concerns and a strong U.S. dollar. Misra identifies the recent weakness in China as a particular concern, as China accounts for 40-60 percent of global metal demand.

Aluminum
Chinese oversupply is at the center of the recent weakness in aluminum prices. Misra also sees the Chinese devaluation of the RMB potentially leading to an increase in exports and a delay in price recovery. Morgan Stanley sees Overweight-rated Alcoa Inc AA as the best positioned aluminum play and maintains its Underweight rating on Century Aluminum Co CENX.

Copper
Misra identifies three factors that are currently supporting copper prices in the near-term. First, while summer seasonal global demand is typically slow, copper demand tends to pick up in the fall. Second, Shanghai inventories are down 50 percent from their 2015 peak, indicating that a pickup in Chinese demand could be coming soon. Finally, the recent stability in gold prices at around $1,100/oz indicates that deflationary factors could be stabilizing for now.

Morgan Stanley is Overweight on Freeport-McMoRan Inc FCX and projects that the company will be free cash flow-positive in 2016 if prices remain at or above the current level. The same cannot be said for Underweight-rated Teck Resources Ltd TCK.