(Minews) - Caterpillar‘s 2013 results were severely impacted by mining sector weakness. The company’s revenues contracted by 16% annually to $55.7 billion due to reduced spending by mining companies on new machines and equipment purchases. Additionally, throughout 2013, CAT’s mining related after market machine part sales were impacted as mining companies delayed maintenance and repairs on their fleets in an attempt to lower their operating costs. This weakness from the mining sector weighed heavily on CAT as it generated nearly a third of its business from this sector.
However, looking ahead, there’s some cheer for CAT as certain trends in the mining sector point towards a recovery. Right now, mining companies are working their newer machines more hours at the expense of their older machines, which typically require more frequent part replacements and repairs. Eventually, these companies will have to undertake aftermarket machine part purchases in order to prevent their machines from downtime. Accordingly, Caterpillar currently estimates its mining related aftermarket machine part sales to level off in 2014 after declining through 2013.
Additionally, mine production and consumption of commodities such as coal and iron ore continue to grow and is expected to rise through 2014 based on improving global economic growth. We figure this trend will also increasingly compel mining companies to resume new machine purchases. On its part, CAT estimates its mining segment sales to contract by 10% in 2014, from 2013. However, these trends of lower than normal levels of aftermarket machine part purchases by mining companies and steadily growing mine production will, in our opinion, lead to recovery in the mining sector. The essential question therefore is when this recovery will take place.
It is here that we figure an analysis of mining sector’s recent past can prove helpful. In early 2009, outlook for the global mining sector was bleak due to the downturn brought about by the global financial crisis. By 2010, this bleak outlook turned positive driven due to the recovery in the global economy. It remained positive through 2011 and early 2012, where after it turned bleak again due cost and capital controls initiated by many mining companies after incurring large asset write-offs. The sector continued to see a downcycle through 2013 as mining companies lowered their capital investments in machines and equipment, but right now backed by trends outlined above, we figure that recovery in the sector is in sight. These past few years illustrate that mining sector’s outlook can change pretty rapidly. So, if not by 2014 end, then mining sector could see recovery in early 2015.
Caterpillar’s fourth quarter results also exceeded expectations reflecting a bottoming out mining sector. The company’s profits grew by 5% annually in the quarter after falling steadily for the past many quarters.
