Caterpillar's Q2 Earnings Raises Industry Red Flag

July 25, 2014

 

Playing the market with stock in mining companies takes a strong stomach. The past few years have seen roller coaster ups and downs that have rocked the nerves of even the steadiest investors. In addition to uncertain sales figures, union strikes, military interventions and accidents at mines there has been tremendous pressure from environmental groups to clean up mining sites. All of this has created a risky market at best.

 

Now, adding to the bad news is the report from Caterpillar, the world's largest maker of < href=http://www.amking.com/en/equipment#!>mining equipment, that their 2nd quarter revenues fell 3%, the sixth sales decline in the past eight quarters. The company noted slowing demand in China and Russia, countries that have been big buyers for years as both expanded construction and mining operations both at home and in foreign countries.

 

However, China is feeling the effects of its rapid expansion and now has major problems with debt on projects that are not finished and entire cities with no one capable of living in them. Russia has also been experiencing an economic slowdown that turned into a halt when many countries imposed sanctions on it for their involvement in the Ukraine crisis.

 

Caterpillar also pointed out growing turmoil in the Middle East, including Gaza, Syria, Iraq and Egypt that has caused a halt in construction and extremely unsafe sites for mining and exploration. The sudden gains of the militant group ISIS led to the capture of Iraq's biggest oil refinery and the immediate shut down of the operation.

 

North America is the only region reporting strong sales but that is only keeping the company above water; without Chinese, Russian and Middle Eastern investment Caterpillar cannot and will not grow.

 

Prior to the slowdown, Caterpillar was positioning itself for a dominant role in the mining equipment industry. The boom in mining and construction led to more demand for coal, copper and iron ore which kept the orders for heavy equipment rolling in. Now, Caterpillar is smarting from their aggressive buyout of mining equipment manufacturer Bucyrus, for which is paid $8.8 billion for in 2011.