While Australian exceptionalists and rent-seekers are still selling the line that the mining boom is alive and well, a better gauge of the health of sector is the world’s largest mining equipment company which overnight warned on profits again and is in the midst of an annus horribilis. From the WSJ, the big Cat has issued its third profit warning this year:
Caterpillar Inc. (CAT) promised further efforts to drive costs down after reporting a surprisingly steep 44% drop in third quarter earnings.
The Peoria, Ill.-based maker of heavy equipment continues to suffer from a plunge in demand for mining equipment but also surprised analysts by reporting downward pressure on prices for construction equipment.
As part of a cost-cutting drive, Caterpillar said it reduced its global work force to 137,104 people, down 9% from a year earlier. The company said it instituted “general austerity measures across the company.” Capital spending this year will be less than $3 billion, down from $3.4 billion in 2012.
“We’re not finished and expect to take deeper actions to improve our cost structure,” Doug Oberhelman, Caterpillar’s chief executive, said in a prepared statement.
…About three-quarters of the drop in sales was due to lower sales of mining equipment, Caterpillar said. It expects the resource industries segment, which mainly makes mining equipment, to show a 40% sales drop for the full year, while power systems, mainly engines, and construction equipment fall about 5%.
The main point here is that both orders and prices are falling. Cost-out deflation is the new normal for mining and it has only just started.
Of course Australian mining services firms have also been pouring out the profit warnings for year or more and Bradken underlined that again yesterday:
Mining services company Bradken has warned of further redundancies as it grapples with a drying up of contracts as the resources boom declines.
Speaking at the annual meeting, chief executive Brian Hodges said he was forecasting similar revenues this year to last, but expected the first half to be marked by a ”dramatic” drop off in orders from mining companies as commodity prices fell. ”It started in October for us and has been quite strong and dramatic,” he said.
…”We stress the first half of 2014 will be quite challenging.”But the company said it expected conditions to improve in the second half.
”If recent improvements in order intake continue, we still expect the year to be broadly comparable with 2013.”
Sorry to say, fellas, conditions will get worse in the second half as the capex cliff steepens and steepens again. the cuts will intensify. Why anyone is still buying these stocks is beyond me. In the words of Morgan Stanley the capex cliff is “severe and prolonged”.
