Caterpillar feels the pain of mining industry

The company’s second-quarter report highlights the difficulties of the industry.

The weakness in the mining sector was highlighted overnight with the world’s largest mining and construction equipment maker, Caterpillar (NYSE: CAT), releasing a disappointing report for its second consecutive quarter.

The company’s profit fell a massive 43.5% to just US$960 million, compared to the US$1.7 billion recognised in the previous corresponding period, which has confirmed the weakness the industry is facing.

Over the last year, Caterpillar has reduced its global workforce by a total of 8%, including 10,000 full-time employees. The jobs cuts have come as the company tries to combat diminishing demand for its products as mining companies around the world lower their capital and operating costs – including announcing delays on new projects and expansions – as the rate of growth in China continues to decrease.

The values of commodities have also fallen, which has prompted an enormous reduction in spending. Mining heavyweights BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO), for instance, have maintained a heavy focus on divesting in non-core assets and capital spending in order to increase long-term sustainability and shareholder returns.

As such, Caterpillar cut its own inventories by US$1.2 billion for the quarter, whilst its dealers also reduced their inventories by a total of US$1 billion which, together, were “significantly negative to profit.”

Doug Oberhelman, Caterpillar’s chairman and CEO, stated that “we’re actually producing and selling to dealers far less than they’re selling to end users and their customers. That bodes well for the future, but it’s certainly been a drag on earnings.”

With the CEO stating that “there’s no question there’s a slow down,” the company also announced that its outlook for the remainder of the year was bleak with spending in the industry expected to remain subdued.

Foolish takeaway

With weak manufacturing data emerging from China, the news has added to concerns regarding the direction of the economy. The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is slightly down today after three consecutive days of gains.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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