On Thursday, Caterpillar, the world’s largest construction and mining equipment maker, warned that 2016 would be a grim year for it. It predicted that its revenues would decline for a fourth straight year — the first such decline in the company’s 90-year history. Caterpillar machinery is used in road building and in the mining, forestry, energy, transportation and material-handling industries. In 2014, its revenues were slightly more than $55 billion.
Doug Oberhelman, the company’s chief executive officer, said he does not expect “an improvement in world economic growth or commodity prices” in the near term.
The company said its declining fortunes were caused by depressed prices for mined commodities such as iron ore, plus lower oil prices and weak economic conditions in developing countries.
In addition to the unfriendly global economic conditions, Caterpillar in 2011 made, in the words of Warren Buffett, “an unforced error” by spending $8.8 billion to acquire mining equipment company Bucyrus International.
The acquisition was based on what was then a high demand for the commodities CAT’s equipment helps extract.
In hindsight, CAT’s timing was terrible, because the high demand for commodities didn’t last. China’s hunger for raw materials lagged and it reduced its orders for construction equipment. And the U.S. dollar grew stronger relative to the rest of the world’s currencies, making the prices of American products less competitive.
To see how much China’s plummeting demand for commodities has gutted prices, consider these statistics from Macquarie Research on what percentage of worldwide consumption China’s voracious appetite represented in 2015: thermal coal, 77 percent; iron ore, 73 percent; aluminum, 50 percent; steel, 46 percent; copper, 45 percent; and oil, 12 percent.
Oberhelman, Caterpillar’s CEO, sees one bright spot: the passage last year of a $325 billion, multi-year U.S. highway bill that will increase infrastructure spending and demand for construction equipment.
At a news conference following CAT’s earnings announcement, Oberhelman provided a bleak assessment of today’s global economy.
“Many of the key industries we serve have a long history of substantial cyclicality and are currently operating well below prior peak levels. For example, mining equipment sales are far below the prior peak and are substantially below what we would consider a reasonable replacement level. Oil and gas equipment sales has declined substantially as a result of lower oil prices, and construction equipment sales are well below prior peaks in North America, Latin America, Europe, Africa, the Middle East and Asia Pacific.”
Caterpillar has historically served as a bellwether for the global economy.
It now finds nearly all of its businesses in a deep slump.
To cope with declining revenue, the company on Thursday outlined cuts in the company’s three largest segments: the construction, resource, and energy and transportation industries.
Caterpillar said it will reduce its worldwide workforce by more than 10,000 people and close up to 10 percent of its manufacturing facilities.
Since 2013, the company has closed or consolidated more than 20 facilities, a total of 8 million square feet, and reduced its workforce by more than 31,000. When I contemplate the importance of China to setting global commodity prices, one image continues to dominate my thoughts. In my visit to eight major cities in China in 2014, I saw hundreds of unfinished, 50-floor skyscrapers, sheathed in nylon mesh material. This massive infrastructure expenditure anticipated consumer demand that will not materialize for many years.
China now wants to build up its service industries to counter the decline in its manufacturing sector. The change will slow the relocation of its rural populations to its urban areas. Caterpillar’s widespread cuts in operations and employment show that, as China goes, so goes the demand for commodities globally.
For me, the cat is out of the bag on the severity of the global slump.
Originally published in the Sarasota Herald-Tribune
