Earlier today, China's official survey of factory managers revealed a seventh straight quarter of contraction, and estimates put the country's annual economic growth easing to 7.4% in 3Q, before picking up to 7.6% in the final three months. September PMI remained near August 2012 levels, which was the lowest reading since November 2011, with demand remaining weak for refined metals, steel and other building materials.
We have identified five companies that investors should pay attention to when considering their exposure to China. These companies all have large amounts of revenue from the country or are in industries that China has a heavy hand in—including industrial building, mining or resource industries—those where the Chinese government continues to expect slowing demand.
Cliffs Natural Resources Inc (NYSE:CLF), the international mining and natural resources company, received over 30% of its 2011 revenues from China. Even with the continued decline in China’s economy, driven by a slowdown in construction, the company has managed to grow revenue at a 29% CAGR over the past five years. The company’s strong performance was driven by increased steel production, higher demand and rising prices.
Global crude steel production increased just one percent in the first half of 2012, while the demand for iron ore softened. China plays a big role in global steel prices. A slowdown in the Chinese economy will mean less steel consumption, which is bad news for Cliffs. China produced almost 50% of the global steel consumed in 2012—meaning China can more than sufficiently meets its own demand—forcing Cliffs to look to other countries to supply steel to. However, in doing so the company must directly compete with much larger miners like BHP Billiton and Rio Tinto.
Worth noting is the company’s outsized dividend when compared to mining peers, at a 6.3% yield. Cliffs is a top pick by billionaire fund manager Ray Dalio.
Emerson Electric Co. (NYSE:EMR) cited a Chinese slowdown earlier this year as a drag on the company’s performance. Emerson received over 20% of its 2011 revenues from Asia. Emerson, the provider of industrial automation and uninterruptible power supplies, has seen pressure from limited infrastructure spending in key countries. The company has seen this quarter's EPS estimates cut from $3.87 to $3.68 over the last 90 days. China, along with Europe, are cited as the main reasons—with Emerson getting over 45% of its total revenue in 2011 from these two markets. A Chinese slowdown and further concerns in Europe could continue to put pressure on the company, which is down over 8% in the last six months.
Mosaic Co (NYSE:MOS), the potash producer, is predicting a rebound in volume shipments for 2013. Mosaic expects a modest 2% increase in 2012 revenues on the back of a 12% 2011 increase. However, China is the world’s largest potash consumer. As well, China has a sizable buildup of inventory and is expected to play a large part in pricing for the near future—leading to lower per ton price for other producers. D.E. Shaw, Chilton Investment Company and Steven Cohen all reduced their 1Q stakes by over 20% during 2Q. While some funds might be dumping Mosaic on a less than stellar Chinese outlook, we believe a few funds see Mosaic as one of the companies that may see an uptick on recent weather concerns.
Alcoa Inc. (NYSE:AA) recently lowered it outlook for China’s aluminum consumption, with growth expectations at 11% versus the previous expected 12% for 2012. The country's aluminum consumption was up 15% in 2011. The global slowdown—where global GDP growth is expected to come in at 2.5% for 2012 versus 2.7% for 2011—has led to a market surplus of aluminum. Alcoa is expected to see a revenue decline of 6.1% in 2012, versus a 2011 rise of 19%. Although Alcoa gets a relatively small portion of its revenues from China, the country’s outlook plays a big part in aluminum pricing worldwide.
Newmont Mining Corp (NYSE:NEM), the world’s second largest gold producer in the world, has benefited from the move up in gold prices over the last few years—see other gold plays that we like. The company continues to see pressure from a drop in global gold demand, driven by market-specific contractions in India and China. Newmont received over 30% of its 2011 sales from Asia. The company posted 2Q EPS of $0.59 versus $0.90 and narrowed its 2012 outlook, reducing gold production estimates from 5-5.2 million ounces to 5-5.1 million ounces.
Each of the five of companies mentioned here have cited that a slowdown in China has put pressure on their performance, yet all have exposure to other markets that can help prop up operations in the meantime, but not without possible earnings concerns. In most cases though, China's impact goes beyond country-specific exposure, most notably in the commodities and materials markets. A bright spot for Alcoa could be China's shift away from being a dominant net exporter of aluminum, which has played a large part in creating a market surplus and keeping prices low. Mosaic should also see long-term demand increases as population growth and higher living standards across the globe lead to an increase in grain demand.