If it weren't for China ...
by Tony Sagami
Alcoa is always one of the first companies to report its quarterly earnings, so the Wall Street crowd is typically very eager to hear what the aluminum giant has to say.
Well ... Alcoa reported better-than-expected results, and that made the bulls very happy. As always though, the devil is in the details ...
First, Alcoa lost a bundle of money — $454 million and a painful 44 percent drop in year-over-year earnings — so business still stinks ... just not as bad as Wall Street was expecting.
Second, this is the third quarter in a row that Alcoa has lost money, so being an Alcoa shareholder hasn't been rewarding. Alcoa was over $40 last summer but is now less than $10 a share.
And if it weren't for China, Alcoa's share price would probably be a lot lower.
In fact, China is the only region in which Alcoa expects to see some growth. Alcoa CEO Klaus Kleinfeld, said that while global demand for aluminum is expected to decline by 7 percent in 2009, but that figure would balloon to -10 percent if not for China.
That means that China is one of the few parts of the world where business is improving.
"China is clearly out of the woods. Things are bottoming out, and they are even coming back in some sectors," Kleinfield said.
The underlying reality is simple — countries with growing economies consume lots of natural resources.
Aluminum isn't the only natural resource that China is gobbling up. For example, China's copper consumption grew from about 1.8 million tons in 2000 to nearly 5 million tons in 2008. China consumed 13 percent of the global supply of cooper in 2000, but increased that to 28 percent in 2008.
China is also the world's largest consumer of zinc, lead, nickel, and aluminum in the world.
As I mentioned in my Saturday video update, China just spent $1.5 billion to buy a 17 percent stake in Teck Resources (TCK), a Canadian gold, copper, zinc, and coal mining giant.
What about energy? In 2003, China passed Japan to become the second-largest consumer of energy after the United States. That's why the Chinese government said it will increase its strategic crude oil reserves by 160 percent to 270 million barrels in the next five years and spend $4.4 billion to build those storage facilities.
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Two Reasons Why China Will Continue
To Gobble Up Natural Resources
As an investor, you need to ask yourself whether or not China will continue to gobble up natural resources at that hungry pace?
The answer is 'yes' because of two things: (1) 1.4 billion citizens and (2) $1.9 trillion of cold hard cash that is burning a hole in the Chinese government's pockets.
Whether you're talking about basic materials, energy, or food, there is no question China is going to keep on consuming a bigger piece of the global natural resource pie and push the prices of those commodities higher.
What you need to do is get ahead of that Chinese buying binge and get 'long' whatever the Chinese are buying. In the case of my Asia Stock Alert subscribers, we already own stocks like Yanzhou Coal (YZC) and Sino Gold (SGX).
Don't forget to connect the dots to other businesses that will benefit from China's appetite for natural resources:
Shipping companies that deliver those natural resources to China i.e. Genco Shipping & Trading (GNK)
Construction companies that build the power plants i.e. ABB Ltd. (ABB)
Food companies that feed those 1.4 billion hungry mouths i.e. Zhongpin (HOGS)
Construction equipment makers i.e. Komatsu (KMTUY)
Alternative energy companies i.e. Trina Solar (TSL)
Companies that help provide clean water i.e. Duoyuan Global Water (DGW)
If you're more of a mutual fund kind of investor, take a look at U.S. Global China Opportunity (USCOX), a China-focused mutual fund that has a heavy weighting of natural resources and commodity stocks.
There are lots of ways to profit from the coming natural resource boom. How you do it is up to you, but I strongly suggest that you get 'long' whatever the Chinese are buying. It should be one of the most profitable moves you could make.
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Uncommon Wisdom (UWD) is published by Weiss Research, Inc. and written by Sean Brodrick, Larry Edelson, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in UWD, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in UWD are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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