Early Signs of Improvement in China

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During a recent industrial conference, the CEO of Joy Global discussed several positive signs for future growth in China.  Some excerpts are shown below.

“In the international markets, commodities are very, very dependent upon China. And China had its own headwinds through most of 2012. But in the latter half of the year, we started to see improvements in fundamentals. And we look at things that both are more discretely measurable and things that are more directly -- have more direct impact on our business. So we looked at electricity demand in China. We saw that turn in September and has been consistently improving month-over-month for the last 5 months.” - Michael W. Sutherlin, CEO of Joy Global during presentation on Feb. 20.

To act on this idea that China is in the early stages of improvement, there are a wide variety of potential investments.  I think the cheapest of all are the copper miners, Freeport-McMoRan (NYSE: FCX) and Southern Copper (NYSE: SCCO).

As Mr. Sutherlin mentions, commodity prices are very dependent on China. Copper prices have had a rough year: the most liquid copper ETN, iPath Dow Jones UBS Copper Total Return Sub-Index ETN, is down 5% thus far this year – with the S&P up 6%. The drop in copper prices has hurt the two copper major copper miners.

Freeport-McMoRan is down a surprising 8% YTD.  The company recently announced that it is acquiring Plains Exploration and Production and McMoRan Exploration, two oil companies.  These acquisitions will give the company exposure to new commodities as well as a whole new set of operational risks.  Due to these risks, Freeport is trading with a PE ratio below 10 and sports a yield of almost 4%.  Over the past three years, whenever Freeport-McMoRan has yielded 4%, shares have bottomed.  The chart below, from marketwatch.com, illustrates this.  From this chart, investors interested in buying Freeport-McMoRan have a clear entry point.


<img src="/media/images/user_15781/fcx-yeild_large.png" />

A drawback of investing in Freeport-McMoRan is volatility, as shown in the chart above.  Investors who aren’t comfortable with that level of volatility should look to the other major copper producer.

Southern Copper is down 2% YTD.  The company is the biggest pure-play copper miner after Freeport’s acquisitions in the oil space.  The company’s PE Ratio is just over 16 and it yields 2.5% at current levels.  Southern Cooper is much less volatile than Freeport.  Southern Copper has been in on an upward trend since last summer.  As a result, buy points are less clearly defined than for Freeport.  Southern Copper’s management does have a more conservative and constant approach as well.

To gain exposure to a strengthening China, investors can buy copper producers.  As Joy Global says, commodity prices are very dependent on Chinese demand.  Copper producers should see significant upside if the price of copper begins to increase. 

In the statements above, Joy Global stresses that China is in the early stages of a recovery and it may be a while until the market notices this trend.  As a result, investors should wait for lower prices on a market pullback to buy into this trend.  The recent purchasing managers' index (PMI) data from China, which was weaker than expected, shows that there is not a big hurry to get exposure to this trend.  Both companies discussed do pay dividends though, so investors can get paid to wait for the turn to be recognized.

ahokiealum has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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