The Ultimate Commodity Update

Joy Global delivers the best global commodity report that money can't buy.

Christopher Barker
Christopher Barker
Sep 3, 2010 at 12:00AM

Like kids who wish their birthday could come more than once a year, savvy Fools eagerly await the free quarterly status reports on the state of global commodity markets issued by mining equipment manufacturer Joy Global (Nasdaq: JOYG).

I have reviewed expensive research reports that pale in comparison to the breadth and quality of insight that these earnings reports consistently offer, and so each in turn becomes the ultimate commodity update for its time.

Even while industrial production around the world has generally applied the brakes, following a very strong first half, Joy Global remains as happy as a clam. Like its rival Bucyrus (Nasdaq; BUCY), Joy Global remains defiantly optimistic even as quarterly results yielded an 11% slide in net sales and a 4% drop in net earnings to $119 million.

Mining equipment is a long lead-time industry, and Joy Global likes what it sees coming down the pike. The company raised its full-year earnings guidance: noting a confidence-inspiring 51% surge in new orders; and a resuscitation of the order backlog to near pre-crisis levels at $1.8 billion.

New orders for original equipment more-than-doubled from prior-year levels. This reflects both further resumption of capital expenditures that were deferred during the crisis, and also an emerging trend toward expanding global mining capacity in response to persistently elevated prices. These are long-term, secular trends that I have discussed at length for each of the relevant product groups. As such, Joy Global is able to remain appropriately upbeat even during a noteworthy bout of near-term weakness in commodity demand. The company explains: "Although macroeconomic factors could impact near term demand, the longer term fundamentals continue to improve and drive a positive outlook for commodity markets."

Did you feel that?
China's growth in industrial production has hit a speed bump, which I consider a positive development for sustainability given the excessive pace that had been developing. After expanding 18% in the first half, China's steel production (by Joy Global's estimates) will now decline by 4% to 6% in the second half. Meanwhile, renewed weakness in the U.S. -- fully corroborated by steelmaker Nucor (NYSE: NUE) -- is expected to drop steel capacity utilization from a peak of about 75% in May to about 67% for the second half.

Unavoidably, these developments will translate into near-term price weakness in key industrial commodities. Already, we have seen market makers BHP Billiton (NYSE: BHP) and Rio Tinto (NYSE: RTP) signaling a double-digit price decline for iron ore for the third quarter, and coking coal prices have slipped by about 7% from their recent high.

Today's two "c's" of commodities
Of these two steelmaking ingredients, I believe that coking coal's long-term market dynamics continue to present a far more compelling investment thesis than iron ore. I continue to recommend some exposure to export coal producers, and to offer Peabody Energy (NYSE: BTU) as a particularly fine specimen. Of course, coal producers yield plenty of steam coal while digging up the metallurgical variety, and Joy Global points to multiple (and familiar) indicators of rising steam coal demand worldwide for years to come.

Joy Global appears to agree, opining that "the strongest near term upside is expected in the commodities of coal and copper and in the countries of China, Australia, Chile and Russia". This leads me to today's other "c" of commodities: copper.

If you thought a simultaneous industrial slowdown in China and the U.S. would trigger meaningful softness in copper, think again. Increasing demand from the rest of the world stepped in to pick up the slack. Joy Global adds:

Copper prices have remained above $3.00 per pound since late 2009, and the forward curve remains above this level for several more years. As a result, customers are proceeding with copper expansion projects in North and South America and Australia, and with future green field projects in Central Africa and Mongolia.

Assessments like this are music to commodity investors' ears. Essentially, a company like Freeport-McMoRan Copper & Gold (NYSE: FCX) -- which already boasts a strong operational footprint in copper-rich Chile -- can safely target production growth with reliably strong profitability metrics extending right through a typical mine construction timeline. Joy Global is identifying precisely that point in a mining business cycle when investor returns are likely to be greatest, and I do encourage Fools to retain or seek some copper exposure as well as coal.

I continue to view Joy Global and Bucyrus as attractive stocks for a range of economic scenarios, whether recovery ultimately takes hold or the markets go haywire. Please share your views on these heavy equipment makers in the comments below, or join the dedicated investors of Motley Fool CAPS as they discuss these topics in detail.