The Joyful Way to Play Commodities
It's that time of year, Fools ... time for another breakdown of the global landscape for commodity investment by the happiest name in heavy equipment.
My longtime readers will recall that these quarterly updates of the macroeconomic picture provided by Joy Global are consistently filled with timely insight and investable information.
It is my pleasure to continue to offer my take on their discussions for the benefit of commodity-investing Fools.
I hope you enjoy this article, and please rec the article itself if you do. :)
Notwithstanding the considerable uncertainty presented by Australia's proposed 40% resource tax -- which Joy Global warns will slow the decision-making process on some $34 billion in proposed projects -- new orders for original equipment worldwide rose 55% over the prior year. The company's order backlog continues to expand, reaching $1.7 billion by the quarter's end.
While confirming that demand growth in China has moderated from the incredible rates we witnessed to begin the year, Joy Global interprets this as a positive development for the long-term sustainability of China's growth trajectory. I share this view, and will view any resulting near-term weakness in commodity prices as an invitation to press long positions in key raw material producers. What's more, Joy Global notes that for certain products like copper, demand from elsewhere around the globe is catching up to China and India. How commodities pulled out of the monster correction of 2008 was essentially all about China, but from here forward, the global demand landscape may become less of a one- (or two-) hit wonder.
Honing in on the phenomenon that I have identified as the greatest emerging investment story in the raw materials universe, Joy Global pointed to metallurgical coal as a particular point of strength. I have documented a historic shift, among even eastern U.S. coal miners like Patriot Coal (NYSE: PCX) and Massey Energy (NYSE: MEE), and strongly suggested that we are witnessing only latest resurgence of a multi-year bull market for met coal. To the extent that planned production expansions in Australia by key producers there like BHP Billiton (NYSE: BHP) could be delayed by Australia's resource tax, that demand picture grows stronger still.
Despite the recent decline in Chinese imports of copper, global demand for the malleable metal is still expected to grow by 8% in 2010. Joy Global adds: "The longer term outlook is that all copper capacity, including higher cost capacity, will be needed to meet future demand expectations." For the higher margin producers led by Southern Copper (NYSE: SCCO), this is music to miners' ears.
When pundits tend toward panic at signs of a deepening European crisis or further moderation in China's growth rate, I encourage Fools to keep Joy Global's perspective in mind: "Commodity demand should continue to grow over the next several years and beyond today's limited excess mine capacity, and this should support strong fundamentals for demand and pricing for the next several years." When crafting an investment thesis to navigate a challenging economic environment, such comforting words serve to strengthen a Fool's resolve.