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Why Metals Stocks Surged on Tuesday

By Travis Hoium - Apr 19, 2016 at 4:03PM

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Could overthrowing leaders in Brazil result in a recovery for metals stocks?

Image source: Pixabay.

What: Shares of materials and metals stocks surged on Tuesday as global prices rose to a new high. Century Aluminum Co. (CENX -1.85%), Chemours Co. (CC 1.03%), Joy Global (JOY), Companhia Siderurgica Nacional (SID 0.70%), and Vale SA (VALE 0.34%) each went up over 10% intraday as a result.

So what: The price of both steel and iron ore surged today, leading to the bullish sentiment for producers. Bloomberg is reporting that the S&P GSCI raw materials index hit the highest level since November, which should be a good sign. Ironically, the China Iron & Steel Association said it produced a record 70.65 million tonnes of steel in March, and with prices rising, there's expected to be even more supply coming later this year. That will keep the market oversupplied, so rising prices may not last.  

A lot of the bullish sentiment is due to the political turmoil in Brazil. Over the weekend, the lower house voted to impeach President Dilma Rousseff and the Senate is preparing to debate the matter. If she is indeed thrown out of office the speculation is that the Brazilian economy could get back on track as a new administration puts together more favorable growth policies with less corruption. But at this point, that's just speculation.

Now what: While the price movement of raw materials like iron ore and metals like steel have been positive in 2016, the fundamental problems facing the industry haven't changed. Weak global economic growth are putting a damper on demand and Chinese producers are ramping up supply. The result is long-term price and profit pressure for companies. And that hasn't changed.

What has changed is the short-term market sentiment, built on the speculation that Brazil overthrowing its president and others in the government will lead to better growth for the region. But the reforms coming out of that ouster could be years off. And the industry is still facing oversupply and weak margins.

It's those long-term fundamentals that will keep me out of the metals speculation trade today. If we were seeing China cut supply or a boost in economic growth, I may reconsider, but today's move is built on speculation and that's not the kind of move a Foolish investor would bet on for a lasting recovery in materials and metals stocks.

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Stocks Mentioned

Joy Global Inc. Stock Quote
Joy Global Inc.
Vale S.A. Stock Quote
Vale S.A.
$17.49 (0.34%) $0.06
Companhia Siderúrgica Nacional Stock Quote
Companhia Siderúrgica Nacional
$4.32 (0.70%) $0.03
Century Aluminum Company Stock Quote
Century Aluminum Company
$11.65 (-1.85%) $0.22
The Chemours Company Stock Quote
The Chemours Company
$41.26 (1.03%) $0.42

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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