Exchange traded funds dedicated to mining equities, such as the SPDR Metals & Mining ETF (NYSEArca: XME), have been spectacular performers dating back to early 2016. Reduced costs being incurred by miners could be one reason the sector has soared.
XME has been benefiting from rebounding areas of the mining industry that were previously punished, including gold, coal and steel. Many industrial metals and miners rallied on the belief that China would support growth through stimulus measures, augmenting demand for metals while enticing investors to jump back in.
Miners are making a concerted effort to pare costs.
“According to SNL, part of S&P Global Market Intelligence, 2016 exploration budgets at the 1,580 companies covered by the study totalled $6.9 billion, the lowest in 11 years,” reports Frik Els for Mining.com. “Other measures show the extent of the damage to the sector: The average 2016 exploration budget was $4.4 million, the lowest since 2009, and the median budget was $800,000, the smallest in more than a decade.”
As markets move toward the late-cycle phase of the normal business cycle, investors should look to areas like the materials sector and related exchange traded funds (ETFs).
With the economy recovery maturing, the materials sector, which is closely tied to the prices of raw materials, have traditionally done well as inflation rises and late-cycle economic expansions help support demand.
Due to their close ties with the commodities market, the materials sector are susceptible to cyclical demand and volatility in raw material and energy prices. While the sector’s sensitivity to business cycles can expose investors to greater risks, the area may also offer attractive returns during periods of strong growth.
“Spending was dominated by the industry’s largest companies with just the top 10 companies were responsible for over $1 of every $5 spent on exploration – mainly for copper and gold – worldwide last year,” according to Mining.com.
Investors will have to keep a close watch over China, the largest producer of steel, which made up half of the 1.6 billion metric tons produced last year. Beijing has cut back production after the international community accused Chinese producers of dumping excess products on the global market.
“SNL points out that the low level of exploration at earlier-stage projects in recent years, it is no surprise that initial resource announcements have been declining,” according to Mining.com.
For more information on the miners sector, visit our metals & mining category.