The sharp drop in the price of iron ore is a result of a major slowdown in global economic activity, particularly in China. Iron ore is used to make steel, and with falling demand for everything from cars to new construction, iron ore prices have been impacted significantly. However, a recent CNBC article points out that a strong rebound could be coming after the markets work through some short-term concerns, the article states:
"Slumping iron prices are set for a sharp rise in the medium-to-long term, Severstal Head of Strategy Thomas Veraszto told CNBC's "Worldwide Exchange" on Monday. Iron ore prices have fallen sharply since the start of August, in part due to the weakening economic picture in China. Prices currently range between $80 and $90 per metric ton, their lowest level since December 2009. However, Veraszto, forecasts a strong recovery in prices over the longer-term to $107 per metric ton or higher."
China has responded to the recent economic downdraft by lowering interest rates. Lower rates tends to boost consumption and consumer confidence, and this often results in improved economic results in the months that follow. If there is a rebound in iron ore prices, three stocks that could benefit most are heavy equipment makers like Caterpillar Inc. (NYSE:CAT), Joy Global Inc. (NYSE:JOY) and iron ore producer, Vale S.A. (NYSE:VALE).
Caterpillar's shares have been trending lower on concerns over the global economy. In August, Caterpillar's shares were trading over $90, and earlier this year, the shares were even over $100. Caterpillar is one of the largest manufacturers of heavy equipment that is used in agricultural, mining, industrial and construction applications. A recession can lower demand from most of these sectors, although agricultural demand could remain relatively strong.
The heavy machinery that is used by the mining sector (specifically iron ore mining), is almost certainly being impacted by falling iron ore prices, and it gives investors just one more reason to be selling Caterpillar shares. Overall, if China is successful in stimulating their economy, Caterpillar could be a major beneficiary, since the Chinese economy can boost demand for iron ore mining, plus construction, agriculture, etc.
I believe this stock might find support around $80 per share in the coming days, and that could be an ideal time for longer-term investors to start accumulating shares.
Key Data Points For Caterpillar, Inc.:
- Current Share Price: $82.66
- 52-Week Range: $67.54 to $116.95
- Dividend: $2.08 per share, which yields 2.4%
- 2012 Earnings Estimate: $9.62 per share
- 2013 Earnings Estimate: $10.52 per share
- P/E Ratio: about 9 times earnings
Vale's shares have been making new 52-week lows recently, and much of that weakness has been due to the drop in iron ore prices. Vale is one of the world's largest producers of iron ore and fertilizer. With China being one of the largest consumers of both of these products, a slowdown in that country has been a double-whammy for companies like Vale.
That is precisely why Vale could be best positioned to benefit from a rebound in China. This could create higher prices for iron ore and more demand for fertilizers. With this stock yielding about 7%, it's hard to see the shares dropping much more. The dividend appears to be well covered by earnings, so the chance of a cut seems unlikely. Even a stabilization of iron ore prices could cause this stock to gap up, and that is why I would consider averaging into this stock now.
Key Data Points For Vale:
- Current price: $15.88
- 52-Week Range: $15.77 to $28.21
- Dividend: $1.15, which provides a yield of 7%
- 2012 Earnings Estimate: $3.10 per share
- 2013 Earnings Estimate: $3.17 per share
- P/E Ratio: about 5 times earnings
Joy Global Inc.
Joy Global's shares might have already bottomed-out at just below $50 per share. The stock is trading for about half the 52-week high, and for just about 7 times earnings. As such, it is one of the cheapest stocks mentioned here, and it is trading for much less than the average price to earnings ratio of the S&P 500 Index, which is around 13 times earnings.
This company makes heavy equipment that is used to mine natural resources such as coal, copper, iron ore, gold, etc. While gold demand remains strong, the other main sectors are seeing weakness. A rebound in China could fix that quickly as it consumes coal, copper and iron ore. This stock has already started to bounce off of 52-week lows, so it might be ripe for accumulation now.
Key Data Points For Joy Global:
- Current price: $51.65
- 52-Week Range: $47.69 to $96
- Dividend: 70 cents, which provides a yield of 1.3%
- 2012 Earnings Estimate: $7.12 per share
- 2013 Earnings Estimate: $6.89 per share
- P/E Ratio: about 7 times earnings
Data is sourced from Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in VALE over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.