What do the latest results from Caterpillar Inc (NYSE:CAT) tell us about the state of the global mining sector?
Third quarter revenues missed consensus estimates by a cool US$800mln, coming in at US$12.6bn. That was down 6% on the previous quarter, at which time Caterpillar chief executive Jim Umpleby stated that he expected profits per share in 2019 to hit another record.
In the third quarter to 30 September, however, profits per share dipped to US$2.66, from US$2.88 in the second quarter.
Talk of hitting new records has suddenly evaporated. Instead, the company significantly pared its profits guidance for the full year, such that the spread between the formerly forecast upper limit of earnings, US$13.06 per share, and the new lower limit of US$10.90 now amounts to more than US$2.00.
This time round Umpleby has struck a note of caution in market contrast to the tone he took at the end of the second quarter.
“In the fourth quarter we now expect end-user demand to be flat and dealers to make further inventory reductions due to global economic uncertainty,” he said.
But global economic uncertainty isn’t something that has just popped up in the past quarter. Rather, it’s been a feature of all serious economic commentary for more than a year now.
So what is it that’s really changed?
For clues, it’s worth investigating several interesting dynamics in the Chinese economy.
First, China is importing more coal than ever, in spite of former statements by the Politburo that tackling particulate pollution was an extremely high priority.
No doubt it still is, but an even higher priority is providing cheap power to an economy that is beginning to feel the effects of President Trump’s trade war. At things stand, the lower the manufacturing input costs the better.
Air pollution can wait until the Chinese once again feel that they are on a sure path to becoming the new masters of the universe.
Meanwhile, this week Chinese iron ore prices suffered their steepest drop in two months, which is a mixed blessing as far as a company like Caterpillar is concerned. On the one hand, cheaper iron ore prices mean that another input cost for the Chinese economy has dropped, and that in turn might provide some short-term relief to the global economy.
On the other hand though, higher iron ore prices in the wake of the Brumadinho tailings dam collapse earlier this year have been extremely helpful in keeping the major miners ahead of the curve in what would otherwise be extremely tough times.
Was it a coincidence that shares in all the major miners in London fell on the same day that Caterpillar put out its down-beat results? – only insofar as the market was also digesting the new weakness in iron ore.
Lower earnings for the miners of course means a smaller order book for Caterpillar. And if this is what Caterpillar means by “global economic uncertainty” then there’s likely to be plenty more where that came from.
But there’s also the wider question of the global PMI numbers, the latest round of which also came in this week. Europe in particular is a cause for concern. Depending on which way you slice it, the Eurozone as a whole has just avoided recession, the Germans are actually in recession, or the French as a whole are doing surprising well.
The performance of Britain is clouded by the Brexit uncertainty, although it’s noticeable that British PMIs aren’t in general noticeably worse than their continental neighbours.
Taken together though, it all adds up to a distinctly dicey outlook for the global economy. And although this is nothing new generally, that it’s now beginning to bite companies like Caterpillar has a significance for the wider market that may only just be beginning to be felt.