The macroeconomic scenario of poor demand for mining equipment explains why Joy Global (NYSE:JOY) shares have underperformed this year, losing close to 5%. Its peer Caterpillar (NYSE:CAT) also shared the same global problem apart from macroeconomic issues.
Tough Times Ahead
Looking ahead, the scenario for Joy Global is tough, with poor equipment bookings across all geographies, except South America and China. In addition, the underground mining machinery orders also declined by 25%.
However, the higher component and rebuild activity in regions such as North America and Eurasia enabled Joy with an increase in underground service bookings. The demand is expected to be weak across the year, but an increase in demand is forecasted toward the end of the fiscal year. The oversupply and lower commodity pricing is hurting Joy in the global mining business. But Joy Global is expecting an increase in demand for commodities and favorable manufacturing conditions with global economic growth expected to rise 3.5% this year.
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- JOY 15-Year Financial Data
- The intrinsic value of JOY
- Peter Lynch Chart of JOY
In addition, China gives a good business opportunity to Joy, being one of the largest markets in the world for mining equipment. The stable growth rate, industrialization and urbanization of China gives Joy room for growth despite weakness in demand for some commodities. Further, a rampant growth of electricity production in China is another solid reason for Joy Global to be optimistic about the mining business in China.
How Will the Future Be?
But the bottom line is that despite an improvement in macroeconomic factors Joy Global is facing many challenges owing to pressured commodity prices. The loss due to lower prices is making Mining players cautious about investing in new projects. Joy Global is undertaking a restructuring program to counter this situation and still expects growth in the business.
The year-over-year increase in service orders by 4% makes Joy Global expect an improvement in the service business segment. The newly built service centre at Peru is expected to support the fast-growing copper market.
Moreover, the surging power demand and stable natural gas prices are expected to better demand in the service business. With China reducing the commodity prices in the country, Joy Global expects an improvement in its business.
The exciting opportunity in oil field mining makes Joy Global invest in oil projects. Further, China, India and the Pacific nations are expected to see 3% increase in the seaborne thermal coal market, leading to more catalysts for the business.
However, Joy Global’s vast exposure to coal business is not profitable. Around 62% of Joy’s total sales were from coal, the highest among its rivals like Caterpillar. There is a narrowing gap between coal usage and that of gas. The reduced dependence on coal has forced coal miners to exports in order to drive growth which is not at all easy due to peak government restrictions saving environment.
In addition, Caterpillar sees diminishing hope of dominating the railway segment with Siemens having the right to provide 225 extra locomotives, which could rake in a total of $1.5 billion for the company.
Both Joy Global and Caterpillar are in a weak situation. Although Joy Global expects rebound in its business in the future, still, its high dependence on coal and weak commodity pricing will negatively affect its performance. Caterpillar investments are in risk too on account of a big setback due to its Russian ties. Hence, investors must look for alternate investment options.