Overview of the Companies
Caterpillar Inc. (NYSE:CAT) is the world’s leading manufacturer of mining and construction equipment. Nearly 30% of their global dealers are located in China and the Asia-Pacific region. This region made up 27.3% of Caterpillar Inc. (NYSE:CAT)’s overall revenue in the fourth quarter of 2012. Even with the decline in China, Caterpillar reported record earnings and revenues in 2012.
Joy Global Inc. (NYSE:JOY) is a worldwide provider of mining equipment. They manufacture and market new equipment, after-market parts, as well as providing services. Joy Global Inc. (NYSE:JOY)’s sales of new equipment in China took a dive in 2012, but sales of after-market parts increased. Overall, China has the power to drive the growth or decline of Joy.
Deere & Company (NYSE:DE) is the world’s leading manufacturer of agricultural equipment. This company also manufactures construction, forestry, commercial, and consumer equipment. Over 50% of Deere’s revenues come from agricultural customers, making them less susceptible to the woes of the mining industry and China. However, the mining industry is very important to their bottom line, as they have been working to increase their share. Deere & Company (NYSE:DE), like Caterpillar Inc. (NYSE:CAT), reported record earnings in 2012.
A Year to Forget
2012 was a slow year for Chinese mining operations. However, the Chinese economy has shown that year-over-year growth is improving and there are positive implications for global growth. China’s gross domestic product rose 8% during the fourth quarter and activity in their manufacturing sector increased to an 18 month high in December. All of this was helped by the Chinese government accelerating credit growth and infrastructure spending. The year started off horribly, but ended with several positives to head forward.
King of Coal
China consumes more coal than any other country in the world. They also produce the most coal, but not enough to meet their demands, meaning importing continues to grow.
Exports to China from the United States reached record levels in 2012 and are expected to continue in 2013. The U.S. exported 124 million tons of coal in 2012, a 15% increase year-over-year, and exports are expected to remain at or around this level. Overall, Chinese imports increased 29% in January compared to just 6% in December.
One of the main catalysts for this growth in China is the increased usage of electricity. The majority of power plants in China are powered by coal, and in December, electricity usage increased 13% to the highest level in 11 months. This momentum will continue into 2013, driving coal demand to all-time highs.
The company with the most to gain from the rebound in coal is Joy Global Inc. (NYSE:JOY), because over 60% of their revenue comes from coal mining customers. Keep an eye on both the demand of coal and electricity usage to make sure these numbers are moving in the right direction over the next few months.
Copper & Iron
Economic growth is expected to improve the demand for most metals in 2013. Two metals in particular have a direct impact on mining companies, copper and iron. China is the world’s largest consumer of these two metals.
Copper prices are on the rise since China came out and announced that economic growth will be maintained at around 7.5%. This will drive demand for copper, and since China accounts for over 40% of the world’s copper consumption, this is a huge positive for the industry. Copper has traded down about 2% this year, but is expected to rise steadily throughout the year.
Iron ore demand has been driven by the steel industry. Global steel production increase 3.5% in the fourth quarter of 2012 and is expected to grow further in 2013. Companies like BHP Billiton, a worldwide mining company, produced record volumes of iron ore in the second half of 2012 and all of it was sold by year end.
China imported over 70.9 million metric tons of iron ore in December, an all time record for one month. These import numbers can easily be surpassed in 2013 with the optimism China has shown.
The Foolish Bottom Line
A strong rebound in China would send shares of Caterpillar Inc. (NYSE:CAT), Joy Global Inc. (NYSE:JOY), and Deere & Company (NYSE:DE) higher. Growth is expected to increase substantially this year and continue over the next several years. Take a further look into these companies and see if they make sense for your portfolio. Caterpillar Inc. (NYSE:CAT), Joy Global Inc. (NYSE:JOY), and Deere & Company (NYSE:DE) are great long term investments.
The article Mining and China: The Opportunity originally appeared on Fool.com and is written by Joseph Solitro.
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