The Basic Materials sector is staging a rebound after remaining in choppy waters in 2015. The sector, which encompasses a broad range of industries, is finally looking up, supported by a string of factors including relatively encouraging U.S. economic data (including gains in the labor market and construction space) and a steady recovery in oil prices.
2015: A Harrowing Year for Materials
The broad-based meltdown in commodities put several industries in the Basic Materials space on a slippery ground last year. 2015 has been a tough year for commodities, battered by turbulent global markets, bearish sentiment over the Chinese economy and a stronger U.S. dollar. Concerns over waning demand from China (the world’s top consumer of raw materials) amid a growing supply glut weighed heavily on commodities, hurting stocks in the Basic Materials space.
Fears that a possible hard landing of the Chinese economy would shrink the country’s appetite for raw materials – from oil to metals to cotton – cast a dark shadow over the commodity markets last year. China’s move to devalue its currency in an effort to rouse its sleeping economy and push up exports raised concerns about the country’s buying power of U.S. dollar-denominated commodities.
The rally in the U.S. dollar also compounded the problems, making goods priced in dollars more expensive for other currencies, mostly for developing countries with weak currencies. The greenback typically has an inverse correlation with most commodities.
Companies in the mining space, for example, grappled with lower prices of metals they deal with. A stronger dollar, slump in oil prices and the climb in U.S. equities led to a more than 11% decline in gold’s value in 2015. With the Federal Reserve finally ending an era of near-zero interest rates with the December lift-off, gold slouched to six-year lows.
Silver suffered a similar fate with prices sliding around 12% in 2015. Prices of copper – a major industrial metal – also tanked roughly 25% last year on concerns about Chinese economic growth rates, supply glut, apprehensions surrounding Europe and continued dollar strength.
Prospects Look Brighter in 2016
Following a harrowing 2015, 2016 has started on a positive note for commodities. Among metals, gold has been the bright spot with prices scaling higher roughly 19% year to date (with most of the gain coming in February), making it the most attractive safe haven asset at present. Silver prices have also notched up a 14% gain while copper is up around 7% so far this year.
The spike in gold prices has also led to a surge in the share prices of many gold miners. Notably, Barrick Gold Corp. (ABX – Analyst Report) and Newmont Mining Corp. (NEM – Analyst Report) have seen their shares jump roughly 106% and 53%, respectively, year to date.
