How Caterpillar’s weak results reflect mining industry’s huge slowdown – by Peter Koven (National Post – January 28, 2014)

The National Post is Canada’s second largest national paper.

TORONTO – Year-end earnings from Caterpillar Inc. paint a grim portrait of the mining industry for both 2013 and the year ahead, but the company sees spending activity picking up across the sector in the not-too-distant future.

Caterpillar is the world’s largest heavy equipment maker, so its earnings are a useful bellwether for global mining activity. Not surprisingly, the indicators in the fourth quarter were very poor as far as mining is concerned. The Illinois-based company said that revenue from its resource industries segment (which is primarily mining) plunged 48% year-over-year to US$3-billion, with the steepest declines coming in Australia and emerging markets.

The outlook remains very weak for 2014, as Caterpillar expects resource sales to fall another 10% from 2013 levels. “We continue to be cautious about the mining industry,” Mike DeWalt, head of Caterpillar’s strategic services segment, said on a conference call.

The drop in sales reflects the fact that mining companies have made aggressive capital spending cuts over the past year in order to preserve their balance sheets at lower commodity prices. Every significant mining company has cut or deferred some spending plans (especially on new projects), so the impact on Caterpillar was not a shock.

But it obscures the fact that miners continue to dig up metals at a furious pace.

As Caterpillar pointed out, global mineral output was generally higher in 2013 than 2012. Gold production, for example, hit a record last year, according to Thomson Reuters GFMS. The much-discussed “slowdown” in global mining activity is largely tied to new projects or expansions of existing projects. There has been little impact on output from current operations, where companies are trying to improve productivity.

As long as activity remains strong, Caterpillar said that miners cannot put off equipment orders indefinitely. The company expects a turnaround relatively soon, regardless of its conservative outlook for 2014.

“Based on the size and age of existing equipment fleets, we believe that miners are buying new equipment at a rate that’s well below the average replacement level they’ll need going forward,” Mr. DeWalt said.

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