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Mining and China: The Opportunity – Caterpillar Inc. (CAT), Deere & Company (DE), Joy Global Inc. (JOY)

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Caterpillar (NYSE:CAT) Trying to Spark a Flatlining DowMining equipment manufacturers have seen a steep decline in sales due to a slowdown in China. Caterpillar Inc. (NYSE:CAT)Joy Global Inc. (NYSE:JOY), and Deere & Company (NYSE:DE) are the major players in this space and have been directly affected. A turn in China could provide the growth these companies need to outperform the market.

Overview of the Companies

Caterpillar Inc. (NYSE:CAT) is the world’s leading manufacturer of mining and construction equipment. Nearly 30% of their global dealers are located in China and the Asia-Pacific region. This region made up 27.3% of Caterpillar Inc. (NYSE:CAT)’s overall revenue in the fourth quarter of 2012. Even with the decline in China, Caterpillar reported record earnings and revenues in 2012.

Joy Global Inc. (NYSE:JOY) is a worldwide provider of mining equipment. They manufacture and market new equipment, after-market parts, as well as providing services. Joy Global Inc. (NYSE:JOY)’s sales of new equipment in China took a dive in 2012, but sales of after-market parts increased. Overall, China has the power to drive the growth or decline of Joy.

Deere & Company (NYSE:DE) is the world’s leading manufacturer of agricultural equipment. This company also manufactures construction, forestry, commercial, and consumer equipment. Over 50% of Deere’s revenues come from agricultural customers, making them less susceptible to the woes of the mining industry and China. However, the mining industry is very important to their bottom line, as they have been working to increase their share. Deere & Company (NYSE:DE), like Caterpillar Inc. (NYSE:CAT), reported record earnings in 2012.

A Year to Forget

2012 was a slow year for Chinese mining operations. However, the Chinese economy has shown that year-over-year growth is improving and there are positive implications for global growth. China’s gross domestic product rose 8% during the fourth quarter and activity in their manufacturing sector increased to an 18 month high in December. All of this was helped by the Chinese government accelerating credit growth and infrastructure spending. The year started off horribly, but ended with several positives to head forward.

King of Coal

China consumes more coal than any other country in the world. They also produce the most coal, but not enough to meet their demands, meaning importing continues to grow.

Exports to China from the United States reached record levels in 2012 and are expected to continue in 2013. The U.S. exported 124 million tons of coal in 2012, a 15% increase year-over-year, and exports are expected to remain at or around this level. Overall, Chinese imports increased 29% in January compared to just 6% in December.

One of the main catalysts for this growth in China is the increased usage of electricity. The majority of power plants in China are powered by coal, and in December, electricity usage increased 13% to the highest level in 11 months. This momentum will continue into 2013, driving coal demand to all-time highs.

The company with the most to gain from the rebound in coal is Joy Global Inc. (NYSE:JOY), because over 60% of their revenue comes from coal mining customers. Keep an eye on both the demand of coal and electricity usage to make sure these numbers are moving in the right direction over the next few months.

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