Caterpillar: Suffering From Falling Oil Prices?

Caterpillar bulldozer

Image courtesy of Caterpillar Products Inc

Caterpillar: Suffering From Falling Oil Prices?
| published February 2, 2015 |

By Thursday Review staff


Though it may mean little to the average watchers of Wall Street, nor to those who measure the health of the economy by the recent spate of good U.S. news—better employment figures and low inflation (thanks to low oil prices)—there is one company that savvy insiders watch carefully for signs of trouble. That company is sometimes used as a gauge of the long term health of the economy.

Caterpillar, which is headquarted in Peoria, Illinois, is one of those firms upon which economists keep an eye closely fixed. If someone in management at Cat sneezes, someone on Wall Street takes note. If Caterpillar has a bad month or a bad quarter, a lot of experts take note.

Why bother worrying about the health of a company which makes bulldozers, cranes, pavers, fellers, and backhoes? Because as sales, leases and rentals of such products go, so goes the overall economy. Hardly any construction site in North America is not without at least a few of these building, demolition or hauling products. When sales and rentals of these heavy contraptions suddenly dip, or when demand for parts suddenly plummet, it sends alarm bells into the upper reaches of the professional economic watchers everywhere. When demand drops worldwide, as it has done in recent months, some economists get a serious case of the vapors.

Some of Wall Street’s recent nose-diving was the result of a downturn in the value of Caterpillar, and companies like Cat. To the casual observer, this negativity seems counter-intuitive, especially considering all the other facts of the last few months: the best U.S. jobs outlook in years; low inflation, triggered in part by six months of falling oil prices; consumer confidence at its highest level since before the dark days of the Great Recession; and a robust cycle of consumer spending and investment which is putting more disposable money back into the economy than anything seen in several years.

But despite the U.S. recovery, problems elsewhere in the globe have slowed Cat’s substantial non-domestic sales. Many of the countries which are the traditional big customers for Caterpillar are seeing their economies struggle with market sluggishness and high unemployment, and these countries include Brazil, Mexico, a dozen European countries still suffering with recession, and another dozen nations in Africa where war, violence or disease have snuffed out economic growth. Still other countries are stuck in the difficult downward spirals caused by low oil prices: Russia, Venezuela, Iraq, Turkey, Syria (also torn by civil war), and Indonesia. The net effect of these troubled nations has had a powerful negative effect on Caterpillar. Even China, once the mightiest of all engines of construction and development, has been lowering its 2015 and 2016 expectations.

Worse, those falling oil prices which are the source of so much economic joy in the United States are actually hurting Cat, which makes—among its hundreds of products—underground mining equipment, pipe-laying machines, rock removers, material handlers, drills, and a myriad of products and machines useful worldwide in the extraction of oil and gas. And several American companies which specialize in the extraction of shale oil have seen the need to slow production, and in some cases shut down completely, in the face of sharply dropping prices (and that may be the deliberate result of Saudi Arabia’s extreme high levels, a tactic some believe is aimed squarely at putting the kibosh on U.S. energy producers). In addition, further delays on major projects such as the Keystone XL Pipeline, which Republicans hope to force back into active construction, and Congressional disagreements over major U.S. infrastructure projects, have taken some of the wind out of Cat’s usually mighty sails.

According to Fortune magazine, Caterpillar, like a lot of companies in sectors dependent on stable or consistent oil prices, did not expect this to happen. Oil prices go up; it’s one of those constants like death and taxes. Even in the conservative scenarios and projections which show the least change, forecasters never—ever—calculate the numbers based on paying 25% less for oil and gas.

In a press release issued last week, Caterpillar CEO Doug Oberhelman said that his company’s projected 9% drop in sales in 2015 is the result of a combination of plummeting oil prices and slowdowns in growth in places like China and Brazil. It’s a rare case of an American company suffering even while most other segments of the U.S. economy are showing signs of good health.

A Caterpillar company press release explained the nature of the problem.

“We expect world economic growth to only improve modestly in 2015,” the report says. “The relatively slow growth in the world economy and continued weaknesses in commodity prices—particularly oil, copper, coal and iron ore—are expected to be negative for our sales.”

But Oberhelman and the brass at Cat are confident the company can weather the storm. The report goes on to explain company plans to adjust accordingly. Caterpillar also hints that it expects China’s economy to begin more robust activity soon, possibly early next year. If so, sales of Caterpillar’s iconic equipment will again be on the rise.

Related Thursday Review articles:

Good Deflation, Bad Deflation; Thursday Review staff; Thursday Review; January 28, 2015.

Oil Prices & Saudi Arabia’s Endgame; R. Alan Clanton; Thursday Review; January 8, 2015.