Politics could soften demand for US heavy machinery exports

Politics could soften demand for US heavy machinery exports

Caterpillar machinery.

With the regional, synchronized global expansion largely intact, rising demand points to a strong year for global trade; however, global politics threaten to soften demand for exports of US heavy machinery. (Above: Caterpillar machinery.) Photo credit: Shutterstock.com.

Strong US construction demand and a healthy manufacturing economy here and abroad helped push containerized trade in heavy machinery up 8.1 percent in 2017, more than three times the category’s average five-year compound annual growth rate of 2.4 percent. But the potential for trade wars and tariffs, as well as slower manufacturing expansion, cloud the outlook for 2018.

The Institute for Supply Management’s PMI index, a US manufacturing benchmark, dropped 2 percentage points in April from March to 57.3, the lowest reading rate since last July, and below the rolling 12-month average reading of 58.4. (Any reading above 50 indicates growth; below 50, a contraction.) The April stat indicates that US manufacturing expanded for the 20th straight month but at a slower rate.

US construction spending rose 3.6 percent year over year in March to $1.285 trillion while dropping 1.6 percent from February. By April, the cost of a wide range of building materials was rising, spurred by concerns about tariffs. Contractors are raising prices but falling behind on the costs of materials they buy, according to the Associated General Contractors of America (AGC).

“The gap between the 6.4 percent rise in the cost of construction goods and the 4.2 percent increase in prices charged is ominous,” Ken Simonson, the AGC’s chief economist, said in a May 9 statement. “Unfortunately, the gap may widen further if tariffs or quotas push up costs further for many steel, aluminum, and wood products used in construction.”

Bellwether Caterpillar cites rising material, freight costs

Caterpillar, the largest Top 100 US heavy machinery exporter, noted an increase in materials costs and freight charges when reporting first-quarter earnings in April. “The increase in material cost was driven largely by steel,” Brad Halverson, group president and CFO, told Wall Street analysts. “We expect steel and other commodity costs to be a headwind all year.”

The company may best be known for its heavy earthmoving and mining equipment, but Caterpillar also manufactures heavy engines and machinery used in locomotives, heavy trucks, ships, and factories around the globe, as well as aftermarket parts. Caterpillar’s exports in 2017 and in the first quarter of this year were fueled by strong sales in all of its global regions.

“We expect strong economic conditions to continue and for commodity prices to remain at levels that support capital investments,” Halverson said. The cost of steel and other raw materials commodities may rise, but that also benefits Caterpillar’s end consumers, he said. In particular, higher oil prices are driving demand for construction and energy products in North America.

Deere & Co., the manufacturer of John Deere tractors and equipment, expects strong replacement demand for agricultural equipment to boost sales in 2018. Deere expects agricultural and lawncare equipment sales to rise about 15 percent worldwide this year. Home construction is supporting growth in construction and forestry equipment.

“We are working closely with our suppliers and logistics providers” to meet US and international demand in 2018, Rajesh Kalathur, Deere CFO, told Wall Street analysts in February.

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @wbcassidy_joc.