Material Declines From Material Producers

An array of recent warnings signs about the state of the global economy had already made this third-quarter earnings season a key one to watch, but some of the more disturbing indications coming out of the latest results from some key industrial bellwethers suggest that business conditions may in fact be worse than many had feared.

Let's take a quick moment to survey the damage thus far. Citing the now-familiar refrain of "challenging domestic and global economic conditions," AK Steel (NYSE: AKS  ) posted a $60.9 million loss and an 8% revenue decline as its average selling price dipped 7% . Meanwhile, South Korean steelmaker POSCO (NYSE: PKX  ) forecasts anemic growth in global steel demand of between 2% and 3% for 2013, adding, "We expect demand from car makers and shipbuilders to improve a bit in the fourth quarter but overall demand to remain weak through 2013." Both POSCO and U.S. steelmaker Nucor (NYSE: NUE  ) felt the impacts of Chinese overcapacity, which threatens to keep industry margins under substantial pressure even as demand indicators herald a rough patch ahead. A similar set of challenges face aluminum major Alcoa (NYSE: AA  ) , with resilient demand from auto manufacturers and select other end-markets providing a measure of relief in both of these industries.

Other bellwether segments of the industrial manufacturing realm offered no refuge from the decidedly pessimistic tone of third-quarter earnings discussions. Caterpillar (NYSE: CAT  ) CEO Doug Oberhelman remarked: "As we've moved through the year, we've seen continued economic weakening and uncertainty." 3M (NYSE: MMM  ) executed admirably at defending its operating margins during the period but conceded that "Q3 market conditions were challenging, and we expect this through the end of the year." DuPont (NYSE: DD  ) certainly commanded the nervous attention of equity investors Tuesday, careening lower by 9% after recording a 36% drop in adjusted earnings atop a 9% dip in sales and a 5% decline in consolidated sales volume. Citing "weaker than expected demand in titanium dioxide and photovoltaic markets," the materials giant saw volumes for its titanium dioxide pigments dive by 18% from record levels in the prior-year period.

For that particular weakness in TiO2 pigments, DuPont cited "softness in Europe and Asia Pacific primarily due to lower infrastructure spend and weak construction markets." Considering the looming infrastructure-focused stimulus spending in China -- from which I expect we'll begin to see some positive impacts upon commodity and materials demand in early 2013 -- it looks as though this sharp drop in DuPont's pigment sales may be more of an anomaly than some of the other sources of demand weakness that we're seeing in the materials sector. After all, major TiO2 feedstock producer Rio Tinto (NYSE: RIO  ) has forecasted considerable strength in the long-term outlook for titanium dioxide, and its third-quarter production volume increased by 5% after the miner increased its stake in the globally significant Richard Bay Minerals project .

Even as third-quarter business conditions across a range of materials-related industries point to a degree of weakness that caught many savvy operators by surprise, I continue to perceive ample opportunity for investors to position themselves for a relative soft landing in China and the emerging markets vis-a-vis the more deeply impaired and still acutely debt-distressed economies of Europe and the United States. I continue to favor the top of the materials supply chain by selecting quality miners of copper, iron ore, metallurgical coal, and other key industrial commodities. And because I anticipate additional policy responses to persistent growth headwinds on both sides of the Atlantic, I seek protection from troubling economic scenarios through the miners of those metals with the powerful monetary pedigree -- namely, silver and gold.

Caterpillar is the market-share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in our brand new report. Just click here to access it now.

Fool contributor Christopher Barker and The Motley Fool have no positions in the stocks mentioned above. Motley Fool newsletter services recommend 3M and Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2071978, ~/Articles/ArticleHandler.aspx, 9/30/2014 12:38:58 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement