Stronger China growth for Caterpillar

Increased activity in China will help boost Caterpillar sales in Australia and South America

Gulf News

Chicago: Even as Caterpillar, the US-based machinery maker often seen as a barometer of economic activity, predicted continued global economic weakness in the first half of the year and cut its own revenue forecast, the company said it sees stronger GDP growth in China in 2013.

In an outlook that “assumes the Chinese government will maintain pro-growth policies throughout 2013,” Douglas Oberhelman, chief executive, told analysts Caterpillar predicted growth near 8.5 per cent on the mainland. The International Monetary Fund forecasts 8.2 per cent.

“It’s not going to be a 2010-2011 boom in China, but [rather] an improvement from this year that should be good for commodity prices and as important it should be better for commodity demand,” said Mike DeWalt, chief comptroller.

Increased activity in China, which grew at 7.9 per cent in the quarter ending in December, will help boost Caterpillar sales in Australia and South America, among other places that supply China with natural resources, DeWalt said.

Announcing worse than expected fourth-quarter results, the world’s largest maker of earthmoving equipment by revenues forecast full-year 2013 revenues of $60 billion (Dh220.6 billion) to $68 billion, compared with the $62.7 billion to $69.3 billion range it had earlier forecast.

Caterpillar, which generates some two-thirds of its revenue outside of North America, said the lowered revenues range “reflects the level of uncertainty we see in the world today”.

Fourth-quarter earnings came in well below analyst expectations, and less than half of those during the same period last year, reflecting the same weakness in the global economy that Caterpillar said was likely to continue into 2013.

For the quarter ended in December, the company said net income fell to $697m, or $1.04 per share, from $1.55 billion, or $2.32 per share, a year earlier. Analysts had forecast earnings of $1.70 per share.

Earnings were also hit by a charge of $580 million, or $0.87 per share, in the fourth quarter after Caterpillar discovered alleged accounting misconduct at a Chinese company it acquired last year.

The $886 million purchase of ERA Mining Machinery in June last year represented Caterpillar’s latest attempt to crack China’s annual $64 billion machinery market, which is dominated by local companies.

Earlier on Monday, Emory Williams, the former chairman of ERA, said he was surprised by the $580 million writedown. Williams said in a statement via email: “We were especially surprised by this situation as we co-operated very closely with the Caterpillar team during their extensive due diligence.”

On Friday, Caterpillar reported that the fourth quarter had seen the first decline in retail machine sales in more than two and a half years, on a slowdown in demand from Asia and North America.

Global machine sales fell 1 per cent during the fourth quarter compared with the same period a year earlier, according to a filing with the Securities and Exchange Commission. A 7 per cent drop in Asia-Pacific sales and a 6 per cent drop in North America sales drove the fall.

The company’s power systems business also saw a 2 per cent decline in global retail sales.

For the fourth quarter, total revenues were down 6.8 per cent, to $16.1 billion, compared with $17.2 billion in the same period a year earlier, and matching expectations of $16.1 billion.

The drop in revenues was driven by a 13 per cent drop in sales in North America, and a 5 per cent drop in sales from the Europe and Middle East division. Revenues from the construction sector fell 25 per cent.

Caterpillar said dealers had reduced new machine inventories by about $600 million during the quarter, compared to an $800 million increase during the same quarter in 2011.

Adam Fleck, analyst at Morningstar, said he was encouraged by the company’s China outlook and its view that over 1 million new homes will begin construction in the US this year - the most since 2007.

“That’s going to help Caterpillar, especially as the US mining market continues to suffer,” Fleck said. “That’s probably going to help offset some of that [mining weakness] in North America.”

Shares were up 1.86 per cent to $97.36 in afternoon trading.