Why Caterpillar's profits are plummeting

Caterpillar Inc., the largest maker of life-size sandbox toys in the world, has reported a sharp slide in profits for the second quarter in a row, as demand for mining equipment takes a steep downward turn.

The company, which designs, manufactures, markets and sells mining and construction equipment — and is thus seen as a major economic bellwether for the world economy — reported a 45 percent slip in first quarter earnings. That follows a 55 percent drop in the last quarter of 2012.

Caterpillar is still making money — just way less than it used to. In the first quarter, profit clocked in at $880 million, down from $1.6 billion during the same period last year. Overall revenue decreased 17 percent to $13.2 billion, leading the company to lower expectations for the rest of 2013. Caterpillar now expects per-share earnings of $4 on total 2013 revenue between $57 billion and $61 billion, instead of $7 to $9 per share on revenue of $60 billion to $68 billion.

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Caterpillar has also announced plans to cut about 2,000 jobs.

The company's slide can largely be blamed on a drop in demand for mining equipment — down 11 percent globally, and a whopping 24 percent in Asia. As the Financial Times’ Neil Munshi reports, "The U.S. shale gas boom has driven down natural gas prices," leading power producers to replace some coal operations with natural gas — and thus require less of Caterpillar's heavy-duty equipment. The other culprit, Munshi says, is the slowdown in economic growth in China — the largest consumer of mined commodities in the world. Industrial growth in China dropped 8.9 percent compared to the first quarter last year, reports The New York Times. And fewer mining projects in China means fewer Hydraulic Shovels and Wheel Tractor Scrapers (see here), which equals less profits for Caterpillar.

The good news (beyond what less coal mining might eventually mean for China's notoriously poor air quality): Caterpillar remains optimistic when it comes to its American business. Chairman and CEO Doug Oberhelman said in a release, "In the United States, we are encouraged by progress so far and are becoming more optimistic on the housing sector in particular."