Iron ore prices are falling. Coal (KOL) prices crashed along with natural gas (UNG). China's residential construction market is slowing down. All these developments tell us we'll either see slower growth in mining, or outright contraction, as we're already seeing with coal in the U.S.
For many companies this will quickly mean that the need to conserve cash will be front and center. And in a capital-intensive industry where no additional productive capacity is needed and there's a need to conserve cash, there's only one quick and obvious solution: to cut capex.
So cut capex the mining industry will. And since one man's capex is another man's revenues, there's an obvious insight to be had here. This obvious insight is that suppliers to the mining industry are going to see a deep contraction in their orders, production, revenues and profits.
The purest mining equipment supplier out there seems to be Joy Global (JOY). Caterpillar (CAT) also has exposure, but it's a more diversified company, probably more able to weather a downturn in this specific sector a bit better.
The low multiples on both these stocks can be deceiving - JOY trades at a TTM P/E of 10.2, CAT at 11.6. They are to be expected at the top of the cycle, and the forward multiples will easily be victim to estimate cuts.
Trying to divine the cascade of consequences from several predictions I've made in the past regarding iron ore, natural gas and coal, brought us to the mining equipment suppliers. The need to produce free cash flow by many leveraged miners, together with slowing or contracting end-markets, will lead to deep cuts in capex by those miners. This, in turn, will bring about a brutal bear market for mining equipment companies. Joy Global seems the purest mining equipment company, so I'm saying that this stock should be sold on any rally.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in JOY over the next 72 hours.