The one-two punch of rising demand and Federal Reserve monetary policy has many investors worrying about inflation. Gold and other commodities have seen their prices skyrocket as investors have flocked to the asset type in spades. New products such as the Global X Uranium Miners ETF (NYSE:URA) have allowed portfolios to tap into commodities sectors previously impossible. Over the longer term, worldwide demand for various natural resources makes them a slam dunk for portfolios. However, short term worries such as potential legislation and weather conditions can weigh down individual commodities. Finding other ways to play the commodities boom can be beneficial for portfolios.
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Hard Hats, Drills and Shovels
With commodity prices and the global economy rebounding, many miners are stepping up their capital expenditures (CAPEX) towards new operations and the expansion of old ones. Brazilian mining company and top iron ore producer Vale (NYSE:VALE) will invest a record $24 billion in 2011 in CAPEX as it diversifies toward specialty metals and fertilizers. Mining group Xstrata (OTCBB:XSRAY) plans to boost capital spending in 2011 by 89% to $6.8 billion. China, through its state-owned investment agencies, purchased $1.1 billion in Canadian minerals and Mozambique coal deposits in June. Overall, analysts estimate that CAPEX spending for the mining industry to be up about 30% this year and will increase by another 10% in 2011.
The real winners of the California Gold Rush of the 1800s weren't the miners themselves, but the suppliers of all of those picks, shovels and pans. Today's modern commodity rush, albeit more sophisticated, is having the same effect. Whether its gold, coal or neodymium, it still needs to be pulled from the ground and with our exploding worldwide population, we are extracting more each and every day. Today's companies that provide all the heavy machinery used in the mining process will be a direct beneficiary of all this increased mining activity. Investors looking for another avenue for commodities exposure in their portfolio can place their bets on the mining equipment makers.
While there are plenty of ways for investors to bet on the price of various metals, such as the PowerShares Base Metals (NYSE:DBB) or Market Vectors Jr Gold Miners (NYSE:GDXJ), investing in the mining-equipment makers requires individual stock picking. Here a few picks.
With the recent rescue of the trapped Chilean miners, worker safety has been pushed to the forefront of everyone's minds. Providing respirators, hard hats, gas-detection instruments and a host of other safety devices, Mine Safety Appliances (NYSE:MSA) will see continued profits as a greater emphasis is place on safety.
Together, both Bucyrus (Nasdaq:BUCY) and Joy Global (Nasdaq:JOYG) control about 80% of the global mining-equipment market. Without them, you can't mine for any materials or metals. Period. Bucyrus' quarterly revenue rose 39%, but fell short of analysts' expectations by nearly 10%. This didn't scare off Caterpillar (NYSE:CAT), though, as the equipment giant's recent $8.6 billion acquisition of Bucyrus may be a game changer in the mining equipment industry. Another player is the second largest maker of construction and mining equipment Komatsu (OTCBB:KMTUY). The company recently raised its full-year earnings outlook after posting a near 10-fold jump in second-quarter profit. Strongly increasing demand from Asia and Komatsu's proximity to those markets makes it an ideal choice.
Rising global demand and threats of increasing monetary inflation have investors looking towards commodities. Prices of the various metals and the companies that mine them have skyrocketed over the past few weeks as investor interest has peaked. Recent increases in miner CAPEX spending have opened up an alternative way to add exposure to the sector. By betting on the equipment makers, investors can profit independently of the individual movements in materials pricing. (For more, see The Industry Handbook: Precious Metals.)
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