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Caterpillar Inc. (CAT), Joy Global Inc. (JOY)- Construction and Mining: The China Connection

When it comes to deciding if construction and mining equipment companies are good plays, the key is to keep an eye on economic conditions in China. Like it or not, China is going to become the hotspot of economic activity in the future as it continues on its path of rapid development. The industry leaders are Caterpillar Inc. (NYSE:CAT) and Joy Global Inc. (NYSE:JOY). Based on economic data coming out of China, it may be an excellent time to get into one or the other – maybe even both.

Caterpillar Inc. (NYSE:CAT)

Acquisitions are great, except when they aren’t

Both Caterpillar Inc. (NYSE:CAT) and Joy Global Inc. (NYSE:JOY) have been absorbing Chinese firms into their operations. For Caterpillar, its most recent acquisition was something of a disaster. Unbeknownst to Caterpillar, Siwei was engaging in ongoing accounting misconduct that it concealed for years. It ended up costing Caterpillar Inc. (NYSE:CAT) more than $500 million (though they did settle with a cut in purchase price) – the one-time charge did wipe out more than half that quarter’s profit. I can only imagine that Joy Global must have decided to take a much closer look at its own Chinese acquisition – mining company IMM. Luckily for Joy Global Inc. (NYSE:JOY), not to mention its investors, everything looks good on that account.

China: Signs that the slumbering giant is awakening

The global economic downturn hurt everyone, China included. There are signs; however, that the Chinese economy is getting back on track, which is very good news for investors in companies like Caterpillar Inc. (NYSE:CAT) and Joy Global Inc. (NYSE:JOY). One bellwether indicator to pay attention to is electricity consumption. Although overall, China saw a decline in the growth of electricity consumption for 2012, a significant jump in the high single-digits took place in the most recent quarter. April’s additional increase of 7% is a good sign that 2013 should see at least the growth of up to 10% in electricity consumption that most analysts are predicting.

Another good indicator is steel output, demand for which comes mainly from the construction and auto industries. February saw China’s steel output surge by almost 10% to an all-time high of 2.2 million metric tons (the previous record was 2.05 million, set the previous month). Other key commodities that are up include aluminum, copper and oil (essential to the machinery manufacturing), construction, and power generation industries.

Demand for those items was so high, in fact, that China had to import more than it normally would, resulting in an actual trade deficit. China doesn’t like running trade deficits, so it is going to be looking to step up mining operations to meet those needs internally.

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