Red Metal Blues

 | Apr 08, 2013 | 5:00 PM EDT
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And now it's copper. The red metal has joined natural gas and iron ore in free-fall as fast-growing supply overwhelms modestly growing demand. Copper had been projected to move into a global surplus in 2013 as demand rose by 5.3%, but supply rose by 6.8% to 8%. That was projected to take copper to a surplus of supply over demand of 330,000 metric tons in 2013 from a deficit of 95,000 tons in 2012 and 132,000 tons in 2011. The average price for 2013, according to Goldman Sachs, would be $8,458 a ton before falling to $7,250 a ton in 2014.

But now it looks worse than that. Commodity consultants Wood Mackenzie project that copper production in 2013 will show the biggest increase since 2004. Copper production in Chile, where mines struggled last year with stoppages and delays, will rise in 2013 with the expansion of the Escondida mine, the world's largest. Copper fell to an eight-month low last week of $7,331 a metric ton.

But even that price is not likely to take a significant number of mines out of production since at current prices copper mining remains profitable. The industry will need to see lower prices before marginal mines are shut down and supply moves back toward demand. This is obviously bad news for copper miners such as Freeport McMoRan Copper & Gold (FCX), Southern Copper (SCCO), Cia de Minas Buenaventura (BVN), and First Quantum Minerals.

Less obviously, perhaps, it's bad news for mining-equipment makers such as Joy Global (JOY) and Caterpillar (CAT). Caterpillar's purchase of mining equipment maker Bucyrus International in 2011 for $8.8 billion in cash and debt increasingly looks badly timed -- copper prices, for example, peaked in 2011. Caterpillar has just announced plans to cut another 2,000 jobs.

Joy Global reported a 30% drop in orders year over year in the quarter that ended Jan. 25. That's on top of a 5% and a 25% drop in orders year over year in the previous two quarters, respectively. In October, Joy Global announced that it would cut 250 jobs. That raises the question, though, of when someone will make a run at Joy Global, the remaining big independent player in the mining-equipment sector. The shares are down almost 24% in the last 12-months but have collapsed an even larger 41% from their Feb. 3, 2012 high of $95.71.

The most obvious buyer would be General Electric (GE), which made two much smaller acquisitions in the sector in 2012. (The company acquired Industrea Limited for $690 million and Fairchild International.) The two deals move General Electric's revenue from mining equipment to about 1% of company revenue. Given General Electric's oft-repeated goal of being No. 1 or No. 2 in each sector where it does business, I doubt that the company will stop with these two deals. (After the deals, General Electric will have a 2% market share in the global mining-equipment market.)

But General Electric, or any other potential buyer, can read the commodity trends too. Joy Global's earnings for the fiscal year that ends in October 2013 are projected to show an 11.5% drop from fiscal 2012. And with producers of copper, iron ore, coal and other mined commodities all cutting capital spending budgets for 2013, I doubt that General Electric will rush to follow Caterpillar's very painful path.

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