Charlotte Mathews
2 November 2009
Johannesburg — THE global mining industry is likely to need substantial amounts of capital equipment in the next few years as demand for commodities from southeast Asia and other emerging markets will be sustained, Caterpillar, the world's biggest maker of heavy machinery, said on Friday.
Demand for equipment would also come from companies which did not invest enough in the 2004-06 boom, Caterpillar chairman and CEO Jim Owens said.
JSE-listed Barloworld owns a number of dealerships in sub-Saharan Africa that sell and service US-based Caterpillar's earthmoving equipment, mainly to the mining and construction industries.
Sales of capital goods are considered an indicator of future economic growth.
Last year Caterpillar's sales were 51bn but they were likely to fall to 34bn this year as a result of the global slump, Owens told dealers, customers and the media in a presentation at Barloworld's head office on Friday.
He said in 2002 the global mining industry's capital investment hit a 25- year low but by 2006, with global commodity prices driven by speculation, there was a frenzy to add capacity to supply the mining industry with equipment. There were supply constraints in a number of items, particularly large casings, bearings and engines.
By last year the average truck in the mining industry was 10 years old. "Capital requirements for the mining industry are going to be strong," Owens said.
Owens, whose background is in economics, said although the recession started in the US, Western Europe and Japan early last year, capital-intensive manufacturers were sustained by demand from emerging markets until the collapse of Lehman Brothers and the credit squeeze.
Caterpillar had contingency plans in place and initially laid off contractual and temporary workers. Later it introduced early retirement packages and finally involuntary retrenchment.
In total, the group shed 37000 jobs worldwide. But it had also introduced pay sacrifices of between 30% and 70% for senior staff.
Although some of the group's dealerships in California were struggling because they were exposed to the residential housing market, no dealerships would close, he said.
Most forecasts were that the US economy would grow by 3% next year, but Owens said he believed growth would be faster.
Low inflation, record low interest rates, unprecedented fiscal stimulus packages and industries with limited capacity were all positive for growth, against a background of high world infrastructure needs, urbanisation in emerging economies and insufficient investment in capital equipment in the last upturn, he said.
"But things can fall apart. The big risks are that non residential construction can collapse and central banks start to raise interest rates too early. There is also a risk of nationalism and protectionism."
Caterpillar would survive even if growth rates were lower, he said, but it had to be flexible.
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