Heavy equipment dealers cut global inventories of Caterpillar rolling stock by about $1.2 billion during the first half of 2020 and are expected to cut another $1 billion in the second half, sending a broader warning of reduced roll-on, roll-off (ro-ro) cargo shipments.
The COVID-19 pandemic has hammered end user demand, CEO Jim Umpleby said during an earnings call on Friday.
Dealer inventories will fall by another $1 billion or more during the second half of 2020, CFO Andrew Bonfield said during the call. “Customers don't want to take delivery of new products during the pandemic,” he said. Caterpillar's total sales and revenues were off 31 percent for the period, sliding from $14.4 billion in 2019 to about $10 billion in 2020.
Heavy equipment dealers cut global inventories of Caterpillar rolling stock by about $1.4 billion during the second quarter of 2020, as Caterpillar expects dealer inventories to fall by another $1 billion during the second half of 2020, Bonfield said during the call.
Key breakbulk cargo
Original equipment manufacturers (OEMs) such as Caterpillar, Komatsu, Liebherr, Volvo, and others build “high and heavy” equipment such as earth movers, crushing equipment and machinery, and feedering and conveyering equipment for the global mining industry. This key breakbulk cargo moves globally on ro-ro; multipurpose/heavy-lift (MPV/HL); and container ships. Sector manufacturers and carriers have been hit hard by the pandemic shutdown, while announcements of massive capex cutbacks in the energy sector have added to the gloom.
However, mining giant Rio Tinto, a key customer for Caterpillar, said in a Wednesday earnings report that despite a 20 percent drop in net earnings in the first half, it is not cutting back on $20 billion set for capital expenditures through 2022. The mining and metals giant will lay out $6 billion in capex in 2020 and $7 billion in 2021 and 2022, respectively. About $3 billion annually will go to “sustaining” capex, i.e. to support present production levels, for example by replacing equipment.
This is a rare bright spot during a challenging period. Caterpillar's second quarter sales and revenue were down 42 percent in North America and in Latin America, respectively, and down 17 percent in both the Asia-Pacifc and Europe, Middle East, and Africa regions. In North America, demand fell due to decreases in pipeline and road construction. Production disruptions at Caterpillar's mining customers affected machine utilization and parts demand, the report said.
Production recovering at lower level
After a wave of production shutdowns during the first quarter, most of Caterpillar's facilities were operating by mid-July, although some of them at reduced levels. Production is likely to fluctuate as the coronavirus disease 2019 (COVID-19) may cause temporary shutdowns, the report said.
The Deerfield, Illinois-based company is the largest manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives in the world. Because it supplies important industrial equipment globally, many analysts consider the company's sales trends to be a 'bellwether' or leading indicator for the global economy. Caterpillar's 2019 sales and revenues were $54 billion.
“In the second quarter, our employees and dealers remained dedicated to providing the essential products and services the world needs under very challenging conditions,” Umpleby said during the call.
He noted that results for the remainder of 2020 will depend on the duration of the pandemic and its impact, that they expect third quarter results to be lower than those of 2019, and that they are not providing earnings guidance for the rest of 2020. The company withdrew its original 2020 earnings guidance in March.