Joy Global Casts Doubts on Chinese Commodity Imports

By Dr. Duru written for One-Twenty

June 8, 2009


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Joy Global (JOYG) CEO and President Mike Sutherland provided intriguing commentary about global commodity demand in his company's second quarter earnings report on June 3, 2009. I was particularly interested to hear him question the sustainability of China's reigniting demand for commodities. By his estimation, Chinese steel exports are now down 60%, back to 2006 levels, leading to an accumulation of 100 million tons of inventory by year-end. Given that China's current restocking cycle is the most aggressive to-date, he figures that commodity imports cannot be sustained at current levels, especially copper.

I sold the rest of my holdings in Freeport McMoran (FCX) back on April 19 after noting "... copper has been on a tear, bouncing over 50% from its lows. It seems that China has been stocking up on copper. I continue to read various reports claiming that China is using its tremendous currency reserves to diversify away from U.S. Treasuries and into hard assets. If China is indeed stockpiling copper to satisfy many years of future industrial production, we should be prepared for a second collapse in copper prices once China is finished - assuming that the rest of the planet's demand will not and cannot pick up the resulting slack." Since then, FCX is up yet another 40% (ouch!), but I am taking Sutherland's warning to heart and keeping my powder dry for the next (potential) sell-off. Even Bret Clayton CEO of Rio Tinto Copper (RTP) was quoted last week in Bloomberg as saying "...the metal may reverse recent gains in the next nine months because of an 'uncertain' outlook...Higher prices have not necessarily been supported by demand."

Overall, the tone of the JOYG conference call was similar to so many this earnings season: somber and circumspect but still full of the teasers about some glimmers of hope about future market demand. For example, despite the warnings about Chinese commodity imports, Sutherland said he is encouraged by China and cautious on the U.S. He also said that there is more upside risk to copper demand than downside risk given the long leadtimes required to restart shutdown mines. He even went so far as to say that "...it is a great time to be in the mining industry if you have the finances to get through a few more bumps." However, JOYG is planning for a wide range of potential outcomes. JOYG forecasts its business trough occurring sometime in 2011 with revenues down as much as 40% from its peak. This sustained downturn in its business will likely result in further layoffs in the next year or so. Sutherland even suggested that JOYG might tap the equity markets responding to a related analyst question: "If price keeps going in the right direction, issuing equity comes into consideration." This is a natural about-face for a company that announced a buyback in the midst of last September's carnage, backed away from that announcement at the gut-wrenching March lows, and now finds its stock price soaring to 8-month highs despite all the uncertainty ahead. The stock market cannot seem to give away money fast enough into the stock offerings of almost any company, so it makes sense for JOYG to drink now from this swelling river and worry less about future droughts.

In the three days following the conference call, the stock jumped 14% giving it better than a double from the March lows. With a forward P/E of 17 now, the market is clearly ready to start throwing caution down the mineshaft even if the executives are not.

Be careful out there!

Full disclosure: no positions. For other disclaimers click here.

DR. DURU®, 2009