Caterpillar on Mining and Commodities

Global construction equipment maker Caterpillar (CAT) offers insight into commodity prices and the outlook for mining. Needless to say, a sharply different tune from last quarter. Those and other key points from Caterpillar Inc.’s Q408 conference call:

Declining commodity prices:

Since the end of the third quarter, aluminum prices were up 45%; copper, which is a bellwether commodity for us, is down about 50%; oil was off about 60%; and natural gas prices were down about a third.

We're now forecasting further declines in commodity prices for 2009 and for most commodities at prices below where they are today, and we’ve cut our growth expectations for economies around the world.

Proactive management:

The company noted deteriorating commodity prices. So it then asked clients around the world to consider their orders and cancel if they don’t want them... Dealers... made substantial order cancellations.

We probably could shift a billion plus in incremental product in 2008 that we’ve just done what we have historically. So, we stepped up, we said no, we don’t want to ship you product and have the wrong product in your dealership, and have to discount it after the fact in order to move it.

Global recession:

Dealer inventories are going to go down literally around the world…I think in North America, we took out dealer inventory quite a bit in 2007, so I think there was a bit of a head start there, but it will be pretty much across the board, not at the same rate, but Europe, Africa, Middle East probably have a little more than, on average, than the rest.

Mining:

So far anyway, areas like gold and gold mining and coal mining have held up, lets say better then steel, copper and certainly the oil sands. And I think as you look forward to the rest of the year, I think we would be a little bit more bullish on coal for example than we would, metals, minerals and quarrying, for example.

Although I think coal and gold mining are a little bit better than the rest, mining is in negative as well. That’s going down compared to the record year of mining truck shipments we'll have this year, but we had a very substantial order backlog on the order of three years... Some of those are likely going to be cancelled.

Outlook:

The mining industry was never able to get all of the equipment they wanted in the boom and the average age of the truck working in a mine today is over 10 years old, which is older than normal life cycles, and so there is a replacement cycle that will likely come as better availability comes about.

The world economy still is short of capacity for a number of commodities, in particularly energy-related commodities that are needed to accommodate growth.

I expect prices in the mining industry will hold reasonably well… It is probably going to be an over correction in commodity prices, but the threshold level for investment was well below the peaks they reached last year. We aren’t looking for those peaks to come back in the foreseeable future, but we are looking for commodity prices to stabilize and rebound a little bit off the floors they will likely hit in the first half of '09.