A Warning for the Stock Market You Should Be Aware Of
While many investors are concerned about the global economy, the stock market continues to move up. Some might be feeling left out of the party. When it comes to getting a feeling of what’s happening in the global economy, starting with the basic raw material 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, less demand for the final product means that mining stocks will receive lower prices 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, now slowing down rapidly, the future is not bright for mining stocks of basic commodities, at least not in the short term. The company states that 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.
This is on top of reports that inventory levels are soaring in China. Basically, the economy appears to be grinding to a halt. This could become significantly worse if these conditions are not worked off. The global economy will feel the stark effects of the number two economy encountering a slowdown. This will most likely mean even lower raw material commodity prices, hitting mining stocks.
Chart courtesy of www.StockCharts.com.
News of the halt in expansion is a good thing; mining stocks realize there is going to be less demand, therefore, they should expand at a lower rate to supply the market with fewer materials. 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. If demand continues to dry up from a weak global economy, you’re left with mining stocks selling raw materials at lower prices.
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 BHP would be expanding to meet this demand. But, according to BHP, it doesn’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.