Are Miners About to Start Spending Again?
Joy Global and Caterpillar have been struggling since the financial crisis. However, shares of both companies have recently rallied, partly thanks to higher valuations and improving sector sentiment. In fact, there are some indications that the mining industry could be about to start placing more orders with equipment suppliers.
One of the indicators that hits at a change in the wind is the fact that equipment destocking at mines is almost complete. Analysts put the destocking completion at around 80%, indicating that destocking could be complete by the end of the year.
With destocking complete, mining companies should start to place orders again. These will be in small quantities, but they should be enough to start pushing sales higher after a drought of sales during the past few quarters.
There are already some indications of this as Caterpillar dealerships are reporting that sales declines have largely stabilized. Dealerships have been reporting sliding sales for some time now.
There is also data from Emeco, a mining equipment rental company, which many analysts consider a proxy for the mining equipment industry. Demand for Emeco's equipment has started to tick higher during the past few months, once again supporting the argument that destocking is nearing completion and companies are starting to bring in new equipment.
What's more, the age of mining fleets is starting to push the boundaries of useful operating life. In particular, Caterpillar fleet replacement rates are running at a historical low of less than 5%. Analysts have speculated that this implies that the average age of a Caterpillar mining fleet is greater than 20 years, compared to the useful life of mining equipment, which tends to be in the region of 8-15 years.
All in all, there are some promising signs that the mining industry could be about to start spending again. That said, there is one mining industry that is unlikely to start spending on capital assets anytime soon: the coal industry.
One area not improving
Equipment orders do not seem to be improving in the coal industry, and this is bad news for Joy Global.
Joy's fiscal second quarter results shed some light on the state of the coal market. The company revealed that while global demand was increasing, supply was rising faster. Specifically, Joy's management reported that during the first few quarters of this year, seaborne coal markets remained challenged as supply outpaced growth. Low-cost prices also pressured many high-cost coal producers.
There was also the issue of iron ore, the price of which has only declined this year despite the fact that global steel production is running at a near 10-year high. The final bit of bad news was the fact that the global refined copper market is expected to move into surplus for the first time in four years this year.
So why is Caterpillar likely to benefit while Joy struggles? Well, Joy specializes in the production of mining equipment for coal mines and underground mining. Caterpillar, by comparison, is more of a diversified mining equipment producer. The company produces everything from Caterpillar-branded cell phones to freight trains. Caterpillar is likely to profit from even a small up-tick in mining equipment demand.
There are some indications that the market for mining equipment is recovering. While Caterpillar is set to benefit from this trend, Joy global will struggle as the company almost exclusively produces equipment for the coal mining industry.
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The article Are Miners About to Start Spending Again? originally appeared on Fool.com.Rupert Hargreaves has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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