When it comes to getting a feeling of what’s happening in the global economy, starting with the basic commodity firms is a good first step. The global economy depends on mining stocks to extract valuable inputs, such as iron ore, that go into making things, such as steel. If the global economy starts to slow down, as it is now, less demand for the final product means lower prices that mining stocks can receive for the extracted materials.
BHP Billiton Ltd. (NYSE/BHP), one of the world’s largest mining stocks, announced that it is not approving any new projects until June of 2013. The company went on to include a delay of its massive $20.0-billion Olympic Dam mine in Australia. With a massive decrease in income to $5.5 billion for the first six months of 2012, ended June 30, as compared to $13.1 billion in the year-earlier period, the company and other mining stocks are feeling the pinch from a slowing global economy.
With China being a major buyer of raw materials that’s now slowing down rapidly, the future is not bright for mining stocks of basic commodities, at least not in the short term. The company cites costs that are continuing to rise and buyers are reducing the level of orders for iron ore, copper, coal, and nickel among other base materials.
Chart courtesy of www.StockCharts.com.
Investors are somewhat pleased with this news, as you can tell by the recent move up in the stock price. With the stock sitting near the 200-day moving average, one should be cautious, as that has been an area of resistance in the past. The reason for investors cheering this halt in expansion is that mining stocks that continue to spend regardless of the global economy are not effectively evaluating the current conditions. If demand continues to dry up, you’re left with mining stocks selling materials at lower prices, but at higher costs to the stock.
While this is only one company out of many mining stocks, because of the size of BHP and the breadth of commodities it is involved in, I think it is a good barometer of the global economy. If company management thought that the global economy was on the verge of turning around, rest assured they would be expanding to meet this demand. But, according to BHP, they don’t see the global economy expanding, and I think this cautious tone should be heard by all investors. Mining stocks in materials such as iron ore and copper will most likely languish until the global economy shows signs of turning around.