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Just as a torch needs fuel to light, it takes a catalyst to reignite the fires of industry when recession grips a nation -- or in this case, a planet.
Amid the frightful Wall Street panic of 2008, shares of the world's leading commodity equities suffered losses resembling those of the financial sector, and even China's seemingly insatiable thirst for resources began to falter under the weight of the crisis.
The fundamental outlook for global commodities strengthened considerably over the weekend, though, as China announced a domestic investment initiative many times greater in adjusted scale than even the Marshall Plan, which so transformed Europe after World War II. With a two-year, $586 billion economic stimulus package that will develop housing, rural, and transportation infrastructure (among a total of 10 programs), China has effectively pledged to the world a baseline level of demand for a range of raw materials and related products.
The way I see it, the market's failure to follow through on China's announcement with a sustained rally in commodity stocks creates a compelling opportunity for Fools looking to invest in this fascinating development. Let's consider the potential impact of China's stimulus with respect to individual companies that may stand to gain.
China rings the bell[wethers]
The announcement is a welcome development for regional suppliers of forged metal products like steel and aluminum. Just weeks after issuing a sobering warning regarding weakening Chinese demand for steel, Korea's POSCO (NYSE: PKX ) can at least identify some meaningful new offsets to likely demand declines from automobile manufacturers, ship construction, and other recession-sensitive sectors.
The modern-day pyramid project
The pharaohs may have succeeded in building the pyramids by harnessing human energy alone, but Fools can bet that fossil fuels aplenty will power China's modern housing and infrastructure boom. To the extent that Chinese oil demand will be stoked by this initiative for at least the next two years, I believe crude oil prices will respond. In my view, the long-term outlook for China's leading oil producer remains as strong as the Great Wall. CNOOC (NYSE: CEO ) is an important cog in China's overall energy security, and it provides an interesting way to play the Chinese stimulus.
As I've reported previously, the number of coal-fired electrical plants China commissioned over the past two years equals half the capacity of all such U.S. plants combined. With 80 additional plants in the works, the outlook for coal demand from China remains as hot as ever. Shares of the world's biggest coal producer -- Peabody Energy (NYSE: BTU ) -- have only weakened further in the weeks since the company agreed to build a massive coal surface-mining project and adjacent coal gasification facility in northern China. I believe the market has failed to recognize the value of that project for Peabody, and the significance of Peabody's position as the only foreign company involved in China's GreenGen carbon initiative.
Back to the basics
Because base metals have been basically bludgeoned, the world's major suppliers of these products may be among the greatest beneficiaries of China's stimulus plan. Copper, zinc, molybdenum, and other base metals are required in countless applications within the scope of an infrastructure investment of this scale, and I believe the ferocity of the sell-off in related equities provides Fools with the best set of vehicles available to play the plan. Copper miners like Freeport-McMoRan (NYSE: FCX ) and Southern Copper (NYSE: PCU ) , in particular, are selling for bargain-basement prices here.
Rio Tinto (NYSE: RTP ) has sounded the alarm of slackening commodity demand from China, but CEO Tom Albanese believes: "this will be a short, sharp slowdown in China, with demand rebounding over the course of 2009, as the fundamentals of Chinese economic growth remain sound." If China moves quickly to take advantage of current commodity prices to stock up for this build-out, then I believe the slowdown might be even shorter than Mr. Albanese suggests.
While economists haggle over the degree to which this stimulus can sustain China's growth in the face of the global financial crisis, this Fool feels confident that commodity demand -- at the very least -- will be unavoidably bolstered on a scale that will ultimately be reflected in recovering share prices.
If you believe, as I do, that this $586 billion stimulus plan makes China even more crucial to recovery for many of the companies that may stand to gain, then consider taking the Motley Fool Global Gains newsletter service for a test-drive for 30 days. The Global Gains team has recommended one of the companies mentioned above, and watches China carefully as it scours the globe for exciting and Foolish investment opportunities.