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China goads commodities bulls

SAN FRANCISCO (MarketWatch) – China's economic planners this week signed off on an economic stimulus package roundly estimated at $150 billion, lifting the lid on what many investors were betting Friday marks the next upswing of the global commodities cycle.

At the same time, as if on cue, Glencore International Inc. (GLNCY) (GLEN) sweetened its bid for Xstrata PLC(XTA) , keeping alive a $36 billion merger deal that would forge the world's fourth-biggest mining company backed by the world's biggest commodities trading house. Read about Glencore's offer.

These two headlines electrified commodities stocks, especially those of coal and iron ore companies that sell their output to steel mills. That's because if China is going to upgrade and expand its roads, bridges, railways, subways, ports and airports, it's going to need a lot more steel than its own mills can crank out, even when taking into account this summer's slump in Chinese steel production. Read about the stimulus plan.

The scope of China's pending orders is huge. Investors recognized this immediately, sending shares of iron ore miners sharply higher around the world. Michigan-based Cliffs Natural Resources Inc. (CLF) jumped 13%, while Rio Tinto PLC(RIO) and Vale S.A. (VALE) shares both shot up more than 6%.

Big international coal mining companies' shares also jumped. Peabody Energy Cop. (BTU) was up 10% while Alpha Natural Resources Inc. (ANR) shares also jumped as much as 10%.

ArcelorMittal(MT) shares surged 6.8% in New York after rising 7.6% in London. United States Steel Corp. (X) jumped 7.9%. Allegheny Technologies Inc. (ATI) shares rose 4.7%.

It didn't stop there. Shares of U.S.-based Joy Global Inc. (JOY) , the world's biggest manufacturer of high-end underground coal mining equipment, surged as much as 7.5%.

On a day when the rest of the stock market was muddling along nearly unchanged, there was a practically a stampede by investors trying to position themselves in the materials sector for the next big boom.

But is all this enthusiasm merited? Hard to say. China has yet to place any orders, and expect it to first fill all available capacity at its own steel mills before it does.

There's also some skepticism among economists that China's latest grand stimulus plan will actually amount to much of an increase in infrastructure investment from current levels.

There's also reason to suspect that today's rally, especially in coal stocks, is getting way ahead of the market, that the pop is a speculative reaction far removed from the underlying fundamentals. Much of the buying spree can probably be pinned on bullish sentiment that's been quashed for months by excess steel inventories and, in coal's case, killer competition from a sudden abundance of cheap natural gas in the United States.

This is not to say that the mighty Chinese growth engine can't once again pull these markets higher, but without a comparable upswing in manufacturing from other corners of the world -- especially North America and Europe -- today's big rally in coal and steel stocks could be both premature and overdone, putting the session's biggest gainers on a trajectory that is still likely to fall short of the levels they hit in June 2008, the peak of the last cycle.

But it's hard to resist jumping on board when such a downtrodden market stirs, even if it's a brief ride.

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