Could this be a trend? US construction equipment giant Caterpillar became the latest western manufacturer to report disappointment in China as demand for capital equipment slows.
United Technologies recently posted a drop in Chinese orders while 3M forecast below-trend growth.
Caterpillar said its Chinese sales fell by $250m to $300m, which sounds like quite a big miss although its top-line impact is modest as China only accounted for 3% of the US giant’s Q1 sales. In its results announcement, the company said:
“Sales of construction equipment in China have been weaker than we previously expected, and we have revised our forecast down in China.”
The firm expects demand to remain weak and the overall machinery market in China to decline slightly in 2012.
We shouldn’t read too much into quarterly results — analysts say Caterpillar’s problems in China are partly attributable to bad forecasting.
Nevertheless, the poor China performance of three US industrial giants has been jumped on by some China watchers as evidence of a shift in the country’s growth model to favor consumer spending over capital investment.
That shift works to the obvious detriment of companies such as Caterpillar or Swiss engineer ABB, which is also experiencing “difficulties” in China according to the Wall Street Journal.
The consequences of a less capital-intensive economic model could be profound, particularly for companies or countries whose growth plans depend on China’s seemingly insatiable demand for commodities.
While it may be uncomfortably reading for commodities bulls, there is mounting evidence that China is moving toward a less investment-intensive development model — and about time to.
According to analysts at Barclays Capital, there are several factors causing China to now put on the investment brake.
These include: a slowdown in GDP growth led by lower growth rates in infrastructure and property investment, the policy goal of further reductions in the energy intensity of the economy and a greater focus on reducing pollution and improving the environment.
These factors point to a lower intensity relative to GDP for some commodities in the future. Counter-intuitively, perhaps, demand for meat and grains will not grow strongly over the next few years and neither will demand for such bellwether commodities as copper, platinum or petrochemicals.
The flip-side of the coin is that the continued rapid growth in urbanization, rapidly rising living standards and increased demand for consumer goods will increase demand for other commodities, most notably coffee, renewable energy and gasoline.
Just to be clear, no-one is saying that China’s appetite for commodities is going to dry up. While demand growth rates for nearly all commodities will slow over the next five years, in absolute terms, the growth in demand for many commodities will stay very high. But there will be winners and losers, so the growth story is a lot more nuanced than it used to be.
The Financial Times’ excellent Alphaville team has a lot more on the Barclays Capital research and this theme of two-speed China here.