Why Haven't Caterpillar's Wings Fluttered?http://www.fool.com/investing/general/2013/10/31/capital-spending-in-the-mining-sector-is-declining.aspx Rupert Hargreaves
October 31, 2013
Caterpillar's (NYSE: CAT) fiscal third quarter results released last week did not make for good reading. The company noted revenue and income declines across all divisions. In addition, the company reported that it was revising its full-year profit forecast down by $1 per share to $5.50, from $6.50 previously. What's more, the company reported that revenues from its resource industries division, which is principally engaged in the manufacture of mining equipment, collapsed 75% year-on-year.
Unfortunately, Caterpillar has reported a pickup in mining sector activity during the past few months, but this has not translated into an increase in demand for the company's equipment. That said, Caterpillar's reported order backlog for the end of the third quarter remained constant at $19.1 billion. This was similar, to the figure reported at the end of the second quarter as a rise in construction equipment orders offset weakness within the resource industries sector .
Still, weakness within the mining sector is expected to continue for the next few years as rising costs and falling commodity prices pressure miners. Indeed, according to data released by Macquarie Commodities' Research at the beginning of this year, mining capital spending, or CapEx, is expected to decline 20% during the year . Macquarie also expects further CapEx cuts during 2014 and 2015, before a slight recovery during 2016.
Actually, mining CapEx is declining faster than originally thought. In particular, during 2012 JPMorgan analysts predicted that global mining CapEx would decline 14% from a high of $136 billion during 2012, to $117 million annually by 2014. However, global mining CapEx is estimated to be around $100 billion this year, a 26% decline already .
Joy produces equipment mainly designed for coal mining, and with multi-billion dollar coal projects being shelved thanks to soft coal prices, it doesn't look as if there will be any let-up for Joy's declining earnings anytime soon. Indeed, according to GlencoreXstrata, the world's largest thermal coal exporter, 30% of seaborne thermal coal production is cash-cost negative. This has caused the company to shelve its $7 billion Wandoan coal project in Queensland, Australia .