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Mining Activity Continues to Plague these Companies

http://www.fool.com/investing/general/2014/02/04/mining-activity-continues-to-plague-these-companie.aspx

Reuben Brewer
February 4, 2014

Last year was a bad one for mining companies dealing with falling pricing in the face of too much supply. It was also a bad year for mining equipment makers Caterpillar (NYSE: CAT) and Joy Global (NYSE: JOY). It doesn't look like much is going to change for this pair in 2014.

Picks and shovels
Caterpillar and Joy Global are basically the pick and shovel makers of the mining industry. That was a great business to be in when miners were expanding aggressively to meet soaring Chinese demand. However, Chinese growth has begun to slow and demand isn't as robust as it was before. Although there is still plenty of demand, the mining industry went overboard on expansion and now there's a supply glut. Commodity prices, in turn, have fallen.

That's led to a pullback in capital spending and caused a nearly 50% drop in mining equipment sales at Caterpillar in the fourth quarter. Luckily for Cat, its other business lines actually saw sales increases, with power systems up 5% and construction up 20%. Joy Global, which primarily sells mining equipment, saw a sales drop of around 25%. Ultimately, the mining weakness is pretty awful news for both companies.

And the future looks equally bleak. Caterpillar's mining sales have been roughly flat for the last couple of quarters at around $3 billion. That's the quarterly level it expects to see, on average, throughout 2014. Joy, meanwhile, took additional restructuring charges in the fourth quarter, "To further reduce and align our cost structure with the expected lower sales volume in 2014..." That's meant headcount reductions and facility closures, and the company isn't done yet—it expects "...additional restructuring charges and savings..." this year.

What about the miners?
So Caterpillar and Joy Global are looking at another tough year, but what about their customers? According to Cat "....mine production and commodity consumption have generally been up in 2013, and based on improving economics, we are expecting both to increase again in 2014." That's good news, but that appears to be working off an oversupply situation since it isn't pushing commodity prices higher.

And all sectors aren't created equal here. For example, Edward Doheny, Executive Vice President of Joy Global, notes that, "We know where we put in a lot of our longwall systems around the world. And so we know we have some high productivity, low-cost production coming online in 2014." That comment is specific to metallurgical coal.

That's bad news for miners like Arch Coal (NYSE: ACI) and Alpha Natural Resources (NYSE: ANR). Both companies are big met miners, with steel making