Caterpillar warns of weaker China demand as lockdowns bite

Caterpillar Inc. warned that demand in China will be even weaker than the mining and construction giant previously expected as Covid-19 lockdowns across the nation threatens to undermine economic growth.

The company’s first-quarter results Thursday showed China sales and demand slumping, even as other businesses including mining and construction improved. Caterpillar had “strong years” in China in 2020 and 2021 and had previously expected this year to be worse, similar to what it experienced in 2019, Chief Financial Officer Andrew Bonfield said in an interview.

“Now our expectations are slightly lower than that,” Bonfield said. “Overall the good news for us is demand is so strong elsewhere that any impact that China enables us to actually supply other customers around the world, and we didn’t miss a beat in the quarter despite the relative weakness of China.”

The shares fell 5% to $203.31 at 9:35 a.m. in New York, its lowest intraday since March 8. 

Caterpillar, which is seen as an economic bellwether, posted adjusted quarterly profit of $2.88 a share, surpassing the $2.61 average of analysts’ estimates compiled by Bloomberg. Revenue rose 14% to $13.6 billion, topping estimates, helped by higher-end user demand for equipment and parts from non-residential construction, and greater demand for mining gear.

Caterpillar’s results signal the threat of an economic slowdown in China, whose markets are tumbling as the nation looked increasingly left to its own devices in a bid to rescue its economy from the Covid crisis. 

While China only accounts for about 5% to 10% of Caterpillar’s total sales, as Bonfield has said in previous interviews, the market still finds the company’s visibility in the country pertinent as it gives some clues on the health of the world’s second largest economy.

Caterpillar said it expects margins to be better in the second half of the year compared to the first six months of 2022, and expects price increases to more than offset rising manufacturing cost for the year.