With the Dow hitting all-time highs again, it’s worth looking back at the Dow Jones in 2007 and examining what has changed. In the intervening time, it has been a wild ride for commodities. Commodity prices soared in 2008 and 2009 as China rapidly industrialized, with oil moving from about $50 per barrel to over $145 per barrel and copper jumping from about $2.70 per pound to over $4.20 per pound [for more commodity news and analysis subscribe to our free newsletter].
With the global recession brought on by the housing crunch, commodity prices collapsed. Since then, it’s been an odd mix of movements. Copper came back strong in 2010 and 2011 and still sits at around $3.50, while aluminum has been pretty steadily down since early 2011 and sits below its 2007 level. Crude, too, has come back and stands north of $90 per barrel despite significant increases in U.S. production.
That has meant some interesting times and changes for the Dow components tied to commodities. There were only two pure commodity companies in Dow Jones Industrial Index when it reached its highs back in 2007 (Exxon Mobil (XOM) and Alcoa (AA)), as Chevron (CVX) was added in the interim. Two other Dow components, though, Caterpillar (CAT) and General Electric (GE), now have much larger commitments and exposures to the commodity sector.
- Market capitalization Oct 9, 2007: $34.9 billion
- Market capitalization March 13, 2012: $9.1 billion
- Share price Oct 9, 2007: $39.72
- Share price March 13, 2012: $8.54
Alcoa has had a tough go of it since 2007. While the company streamlined and refocused itself around alumina and aluminum (selling its castsings, packaging and other non-core businesses), the company has been powerless to fight against weak aluminum prices brought out in large part by a very large increase in aluminum production in China. While major aluminum producers like Alcoa, Rio Tinto (RIO) and BHP Billiton (BHP) have looked to reduce capacity, overall global capacity hasn’t contracted enough, and prices barely cover costs.
Alcoa has actually increased its alumina capacity over the past five and a half years (from 16 million metric tons to 18 million), while trimming aluminum smelting capacity modestly (from 4.6 million tonnes to 4.2 million). Alcoa has 43% fewer employees, but neither operating margins nor returns have improved meaningfully in the interim [see also The Ten Commandments of Commodity Investing].
Exxon Mobil (XOM)
- Market capitalization Oct 9, 2007: $513 billion
- Market capitalization March 13, 2012: $399.2 billion
- Share price Oct 9, 2007: $92.67
- Share price March 13, 2012: $89.26
Exxon Mobil has had an interesting stretch from the Dow’s former highs. As mentioned before, oil prices have been all over the place, and likewise natural gas. Exxon has been relatively quiet on the acquisition front – apart from the acquisition of XTO Energy in 2010, the company has largely not looked to acquire reserves with the checkbook. While oil prices are higher than they were, Exxon has faced an increasingly common problem in the oil and gas fields – finding and extracting oil and gas has become significantly more expensive, and returns have dropped.
Exxon Mobil boasted nearly 23 billion barrels (oil equivalent) of proved reserves in 2007, and 72 billion barrels of proved and probable. That has since grown to 25 billion and 87 billion at the end of 2012. Interestingly, production has not changed significantly over that time, with production running at about 4.2 million BOE per day [see also The Definitive Guide to Fracking].
- Market capitalization Oct 9, 2007: $54.5 billion
- Market capitalization March 13, 2012: $58.5 billion
- Share price Oct 9, 2007: $82.51
- Share price March 13, 2012: $89.28
Caterpillar has changed a lot since 2007 from a commodity perspective. While the company always had a sizable mining business, it was built around machinery like large trucks and wheel loaders. That changed in a big way in 2011 when the company acquired Bucyrus and effectively became an end-to-end mining equipment company [see also Three Forgotten Ways To Play The Mining Industry].
The mining business at Caterpillar has certainly had its ups and downs. The company prospered when high copper, coal and iron prices led miners to ramp up production and open new mines, but the situation has turned over the past year. Miners have pulled back on their expansion plans, China is trying to absorb a large inventory of machinery, and the near-collapse of the underground coal industry in the U.S. has led to sharply lower orders. While Caterpillar is slighly more profitable now (in operating margin terms), the returns haven’t changed all that much.
General Electric (GE)
We have not included a data set for GE, because we believe it would be slightly misleading – while GE had some commodity-related business in 2007, it was not a sizable part of the business. Certainly GE has had interesting times since 2007, as the holdings and obligations of GE Capital seriously threatened the entire enterprise.
Even with those challenges, GE has spent aggressively to become a player in oil and gas equipment. Largely through acquisitions, GE has built up a business that competes with the likes of National Oilwell Varco (NOV), Cameron (CAM), FMC Technologies (FTI) in onshore, offshore, and subsea exploration, drilling and production equipment. And management may not be done – GE has indicated that it is also looking at expansion into the mining equipment/technology market.
The Bottom Line
Much like the Dow Jones itself, the commodity stocks of the Dow have had some significant ups and downs over the past five and a half years, and dividends have contributed almost as much as share appreciation to total returns (apart from the example of Alcoa). All of these companies remain leaders in their markets, but the lack of control and influence these companies have on end-market commodity demand and pricing is sure to keep things interesting moving forward.
Disclosure: Stephen Simpson owns shares of Cameron (CAM).