Concerns regarding China’s slowdown in economic growth are hitting several sectors in the stock market. Coal and steel stocks are the most affected because China is a main importer of both commodities. On July 15, China’s GDP growth was estimated at 7.5%. However, steel production slowed down. This prompts for the evaluation of stocks that have a high exposure to Chinese markets to determine if they can still bring capital appreciation to their investors.
Concerns about steel demand
The company may have issues returning to profitability in the near future. China is the main importer of steel in the world. However, it is also a large producer of steel. The problem that United States Steel Corporation (NYSE:X) faces is that the supply of steel is still high since China recently reported a surplus of the commodity.
On top of that, EPS estimates have been revised down by analysts from a profit of $1.56 per share, to a loss of $0.57 per share. Earnings for 2014 were also revised down from $2.63 per share to $1.30 per share.
As long as the demand for steel remains weak, United States Steel Corporation (NYSE:X) will have issues turning back to profitability. Therefore, investors should steer away until economic data points toward higher steel demand.
Commercial Metals Company (NYSE:CMC) issued $300 million of senior notes due in 2023 to redeem senior notes due in November 2013.
What puzzles me is that the recycling business’ revenues are also declining to $3.2 million, from $3.9 million. The decline was due to the ferrous price decline of 6% to $331 per ton compared to the third quarter of fiscal 2012.
Further, the exposure of Commercial Metals Company (NYSE:CMC) to the Chinese market is negatively affecting the revenues. Since China has a large surplus of steel, Commercial Metals Company (NYSE:CMC) exports to that country are likely to stay down. Therefore, revenues may continue to be low.
Overall, the company is also being affected by lower metal prices, and even its recycling business is struggling. Investors should steer away from Commercial Metals Company (NYSE:CMC) until metal prices begin to recover. The recycling section may be substantially profitable once the overall metals market rebounds.
Coal is directly involved in the steel production
Peabody Energy Corporation (NYSE:BTU) trades with a negative P/E, and its revenues and net income declined in the last quarter according to its most recent earnings report. Revenues fell by 20% to $1.7 billion, and its net income of $173 million swung to a net loss of $23 million.
China is the main importer of coal in the world, and Peabody Energy Corporation (NYSE:BTU) is a main exporter of Coal. I believe the issue is that China has announced that its urbanization program will slowdown in coming quarters due to global economic concerns. Therefore, construction spending is likely to decline, and therefore the demand for coal is likely to be dragged down.
Furthermore, China reported a contraction in manufacturing activities in June. This is also a concern because coal is used as a fuel for electricity production. If manufacturing facilities are consuming less electricity, the demand for coal is likely to decline further. For these reasons, I would recommend investors to avoid investing in this company.
My conclusion
China’s manufacturing activity index showed a slight contraction, impacting the metals sector, particularly steel. Coal is another sector that is observing downward pressure on dimming demands for the commodity. Therefore, investors should steer away from these companies since their exposure to China is large. Further, China has a vast steel and coal surplus that needs to be reduced before these companies are successful exporting their products to China. In brief, I do not recommend owning any of these stocks for the time being.
Robinson Roacho has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Robinson is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Be Careful With China originally appeared on Fool.com is written by Robinson Roacho.
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