FYI | Oct 22 2008
By Andrew Nelson
US heavy equipment maker Caterpillar has always been a pretty good bellwether for the strength of the US industrial economy, especially for the mining, agriculture and construction sectors. It may come as a surprise to many that are caught up in the turmoil that is life in global trading markets, but not only were Caterpillar’s 3Q08 earnings well up on the previous quarter, the increases came from what were once non-core segments of its market.
While price and currency effects provided 42% of the company’s 13% increase in sales revenue due to the weak USD for first two quarters of the year, much of the increase was due to a shift in the company’s geographic mix of sales. North America sales were a slim 3% higher, but “other” regions saw a 22% uptick in sales.
This is an important development given that a quickly increasing amount of the company’s sales are now derived from outside of North America. In fact, sales revenues from outside North America now account for 60% of total revenue, while it was just 56% a year ago.
Geographically, the noted driver of growth for the company was the Asia/Pacific region, with China, Australia and Indonesia, given a ramp up in bulks exploration and production due to higher coal prices in particular, providing much of the boost.
Sales growth came mostly from the agriculture, mining and oil exportation/extraction sectors with the company noting over the last few years, the mining and energy sectors have demanded more large machines, engines and turbines than manufacturers could provide. This has seen equipment fleets age the world around.
As a result, the company believes that planned new investments by mining and energy companies (as evidenced by recent Australian capex data) and the need to replace aged equipment should support continuing strong demand for mining and energy-related products in 2009.
Looking forward we see the dynamic of decreasing North American prominence and the importance of emerging markets as developing further, with the company expecting acute weakness in North America, Europe and Japan for the time being. As such, it is pinning hopes on “pockets of strength” in global mining and energy markets as well as a pickup in emerging market infrastructure development.
In fact, the company says that the rapid growth in the developing countries over the past seven years means that developing economies now present a larger source of opportunity than developed economies. The company is not forecasting in a bubble and admits industry opportunity in developing economies will slow, but it still expects growth in 2009 and this should help to offset an expected sharp drop off in income from developed economies.
As such, Westpac senior economist Justin Smirk suggests the reasonably optimistic outlook by Caterpillar management indicates a rather mild global downturn is awaiting the world, as opposed to a deep recession like economists at Deutsche Bank are expecting.
We’ll have to wait another year or so to find out who was correct.
