While China's growth rate is slowing, investors tend to forget that it's now growing off of a much larger base. Because of this its economy will continue to require an outsize share of the global commodities market. That will push demand for these commodities higher, and in time prices should follow suit. It's a trend that should drive long-term growth for commodity producers Vale (NYSE:VALE), Southern Copper (NYSE:SCCO), and Teck Resources (NYSE:TECK) making them good stocks to watch.
Iron ore: Slowing, but still growing
Chinese demand for the key steel-making commodity iron ore is expected to slow down considerably through the end of the decade. That's evident from the following slide.
As the chart points out, China's iron ore import demand is expected to moderate from a 20.4% annual rate between 2000 and 2014 to just a 1.2% annual growth rate from 2015 through the end of the decade. However, it's important to note that the slower growth rate is coming off of a much larger base. Just to put that in perspective, the projected growth of 41 Mt from 2015 to 2016 would have been 59% if it was off of 2000's base of 70 Mt.
That growth bodes well for Vale, which is the world's largest iron ore producer. Further, while the overall growth rate won't be as robust, Vale is working to reduce its cost so that it can improve its iron ore margins. That combination of moderating growth and improving margins should drive increased shareholder returns over the long term, which is why investors will want to keep an eye on Vale.
Copper: China is large, and in charge
Like iron ore, copper is another key commodity fueling China's growth. As this next slide shows, China consumes 44% of the world's copper each year.
Further, not only is China the largest current consumer of copper, but its demand is expected to grow 4% this year. Demand isn't expected to stop growing anytime soon as copper is such an important commodity for so many important end-uses like electrical networks and construction.
This demand growth bodes well for Southern Copper. Not only is the company currently a top-five copper producer, but it holds the largest copper reserves in the entire world at 69.9 Mt. As a result, the company will benefit from Chinese demand growth in the years ahead, making it an important stock to watch.
Steelmaking coal: Down, but not out
Like iron ore, steelmaking coal is an important commodity for Chinese steel production. While the market is currently oversupplied, which has pushed down prices, it has the potential to correct as production is being curtailed. That improved production picture, plus higher demand for steelmaking coal will benefit Teck Resources as a quarter of its steelmaking coal sales currently are exported to China.
What Teck needs to do, however, is continue to cut its costs. Over the past few years the company has cut its all-in site costs by 9% from the peak in 2012. However, it will need to continue to improve its costs given the fact that coal prices are still weakening. That said, it has more time than its peers as it is among the few coal producers in North America that remains solvent, due in large part to its diversification into copper and zinc. In fact, about 41% of its gross profit comes from copper sales, versus just 32% from coal. That enables the company to enjoy a dual benefit from China's growth making it a key stock to keep an eye on when the global commodity markets begin to improve.
The slowing of China's growth rate has hit commodity producers hard. However, the fact remains that China is still growing. That should drive long-term growth for key commodity producers Vale, Southern Copper, and Teck Resources, which is why investors should keep an eye on these stocks as markets begin to recover from the shock of slower growth in China.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.
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