Trump’s imposition of steel and aluminum tariffs made waves early in 2018, leading shares in steel and aluminum producers higher. As we anticipated, these tariffs were structured to contain exemptions for both Canada and Mexico immediately, with likely carve-outs for additional trade partners later.

Although we’ve increased our near-term steel price expectations in the United States, we remain bearish over the long run. Substantial global production overcapacity leads us to expect most metals companies to fall short of earning their cost of capital over the decade to come. This leads us to view steel and aluminum producers as considerably overvalued today, despite what may appear to be a positive catalyst.

We forecast a significant deceleration in aluminum and steel demand growth and anticipate that the impact of Chinese capacity cuts will prove far overstated. Accordingly, we forecast a long-term aluminum price of only $1,475 per metric ton, roughly 25% below current levels.

A price decline of this magnitude would have a substantial impact on share prices for US stocks Alcoa, Norsk Hydro, Chalco, and Alumina, each of which is trading well above our fair value estimate.

Chinese demand impacts prices

On the demand side, the key factors underpinning our bearish outlook are our below-consensus forecast for Chinese fixed-asset investment and fading benefits from the Chinese stimulus. While some may look hopefully upon India to pick up the slack, we believe it remains several years away from being the next major driver of global metals consumption. On the supply side, we expect Chinese structural overcapacity to remain in place, as large swaths of new, low-cost capacity more than offset the country's progress in closing high-cost facilities.

With few exceptions, we still see mined commodity and miner share prices as overvalued, propped up by the sustained Chinese stimulus. Iron ore's relative buoyancy since early 2016 is emblematic of most industrial commodities. Recent conditions have been highly favorable for miners, particularly the bulk miners, as exemplified by 2017 adjusted earnings for Rio Tinto RIO , which are up nearly ninefold from 2015 levels.

We do not expect this to last. With China's credit growth slowing, we still expect mined commodity prices for products such as copper, iron ore, and alumina to fall materially and for share prices to follow.

Accordingly, we believe the miners we cover are substantially overvalued. We expect a structural change in demand growth from China as its economy matures and transitions toward less commodity-intensive and more consumption-driven growth. High-cost miners and those with outsize exposure to iron ore and coking coal tend to look the most overvalued.

What about gold?

Gold is among the few mined commodities that isn't directly tied to the fortunes of Chinese fixed-asset investment. Despite the Federal Reserve’s ongoing rate hikes and balance sheet reduction, gold investment in exchange-traded fund holdings remains as high as it did when rates were meaningfully lower. As real yields on U.S. Treasuries and other safe-haven asset prices rise, the opportunity cost of holding gold will rise. Yet during the first quarter, prices have remained above $1,300 per ounce.

On the back of weak investment demand, we forecast gold prices to fall to $1,150 per ounce by the end of 2018. Nevertheless, we still believe gold has a promising future, and we forecast the nominal gold price to recover to $1,300 per ounce by 2020. We expect that in the long term, Chinese and Indian jewelry demand will fill the gap left by waning investor demand. However, the rise of consumer demand will take time, which points to downside risk in the near term. Although we see limited opportunities in gold miners, we consider Eldorado Gold undervalued, given the ongoing challenges in its critical Greek expansion projects.

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