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Only a Fool Would Invest in Commodities Now

We just saw a rather ugly spate of data from China, and the result has been a bit of a selloff in markets, from Asia to the U.S.

Not all stocks have been held back. Netflix (NASDAQ:NFLX), for instance, just had its price target raised at Goldman Sachs and rallied 5% to start the week.

But commodity stocks as a whole are taking a beating. And don’t expect the pain to end anytime soon.

You see, industrial demand from China remains the single-biggest driver of pricing for a host of materials and commodities. Base metals, from steel to copper to aluminum, and energy commodities like oil and coal and natural gas are all getting brutalized by the China slowdown.

Let’s start with coal, because the pain is obvious. Arch Coal (NYSE:ACI) is off about 8% today and Alpha Natural Resources (NYSE:ANR) is off almost 10% — continuing a now 50% beating in the past year for both — on the ugly China news. Since the West is not as keen on coal as an energy source, the Asian market is crucial to these stocks. Unfortunately, that market might continue to dry up as growth slows — particularly in the energy-intensive manufacturing sector.

As for oil, keep in mind that the GDP numbers were just one set of data released by the state. China’s oil demand slipped to a seven-month low in March and resulted in a sell-off of more than 3% in crude during Monday trading. That held back Exxon Mobil (NYSE:XOM) and BP (NYSE:BP), among other oil stocks, and makes them both about flat on the year despite a double-digit rally for the S&P 500 year-to-date.

Moving beyond energy, base metals have cratered and supply has crept up across the board. Here’s a look at aluminum and copper over the past year:

metalprices

Look at a chart of aluminum giant Alcoa (NYSE:AA) and copper king Freeport-McMoRan (NYSE:FCX), and you’ll see a very similar pattern. Alcoa is off 18% in the past year. FCX is down 19% in the past 12 months and down 28% from its September peak.

The latest numbers from China will only confirm this trend and weigh on base metals. The fact that this ugly pricing picture has emerged amid a modest recovery in U.S. housing just goes to show that domestic demand can’t offset the loss of demand at metal-hungry China businesses.

You get the picture.

Clearly most commodities are driven by global demand as well as China trends. But it’s undeniable that the largest appetite for most commodities comes from the manufacturing might of China and the rabid demand for building materials amid a housing boom (or bubble, depending on your view).

As China goes, so go commodities. And right now China is under pressure.

With the SPDR S&P China ETF (NYSE:GXC) down roughly 10% since Jan. 1 and continued pessimism over GDP growth, it’s likely that commodities and commodity stocks will continue to underperform in 2013.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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Comments
  • Piyush Jain

    “stay foolish, stay hungry” goes the mantra, so i for one will look at this as an opportunity.
    the chinese consumed commodities to build infra or produce goods which ultimately served the world economy. the world including the usa is growing, albeit slowly and therefore if not china, then some others would partner this growth, as such the consumption of commodities may falter in the short term but in the near, mid and long term commodities will and should rise. if the prices are falling, then good time for investors (and not speculators) to start gradually investing in the commodities companies.