Year-to-date, shares of the aluminum giant Alcoa (AA) are down 8.06% while the Dow Jones Industrial Average (^DJI 0.56%) has risen 12.94%. Alcoa is currently the worst-performing Dow component and one of two stocks to have fallen into negative territory for the year. The other is Caterpillar (CAT -0.55%), the construction and mining equipment company.
So why are these two components lower for the year while the Dow and its 28 other stocks have all risen? Well, there are a few reasons.
The first is China. Both Caterpillar and Alcoa rely on China for a large portion of their revenue, and we've seen over the past few years the country's GDP slowing from the mid-teens to its current 7.5%. This slowdown has come as construction projects and development deals where both Caterpillar's machines would be working and Alcoa's aluminum would be used have dramatically tapered off. In China, we've also seen massive stockpiles of aluminum building up as these construction projects slow down, and the large amount of inventory has had a very negative impact on the price of the metal.
While China is hurting both companies, another main negative driver has been other emerging markets, whose economies have also slowed on the whole over the past year. As major economies throughout the world have struggled, the smaller developing countries didn't get the investment and support they needed from place like the U.S., China, or Europe. Add that to falling prices for precious metals and natural resources over the past few weeks, and the emerging markets look even worse. Most emerging countries rely on the mining or development of natural resources to support their GDP and economies, but we've seen gold, silver, and even copper tanking over the past few months.
Not only would the developing countries normally buy construction materials -- i.e., aluminum -- but they would also be buying Caterpillar's machines to build infrastructure and mine for more resources. But neither of these things are happening and the stock prices have suffered as a result.
The only other question is whether either company can turn around the ship before the end of the year, or even in the next few years. And while I believe the world markets and economies as a whole will be stronger a year from now, I don't have as much faith for Alcoa. The aluminum company is operating in an industry in which the lowest-priced producer wins, and there isn't a whole lot the company can do differentiate its product from the competition. In the past, we've seen Chinese companies move into a market and take control. The U.S. steel industry, for example, was at one time a dominating force, but now it's a weak and unimportant player. I believe Alcoa is heading down a path of the likes of the one U.S. Steel has trod.
On the other hand, though, I think Caterpillar can turn around the ship, because at the end of the day it has a competitive advantage over the competition. Its product is of high quality, and the company has built a well-known brand. While I don't believe Caterpillar will recover this year, I think it will in the future.
