It Is Different This Time—Now Comes The Global CapEx Depression

Caterpillar (CAT) posted a disastrous 16% decline in worldwide retail sales this morning, meaning that its sales have now fallen for 35 straight months. As Zero Hedge noted, not only did US retail sales finally rollover and drop by 8% compared to prior year, but the rest of the world was a veritable bath of yellow blood:

…….. sales elsewhere around the globe were a complete debacle: Asia/Pacific (mostly China) was down -28%, a dramatic drop from the -17% a month ago, EAME dropping -13%, and Latin America down -36%…

Needless to say, this is something new under the sun. CAT is the leading heavy capital goods supplier to the global construction and mining industries and has a long history of boom and bust.

But CAT’s past contains nothing like what is conveyed in the graph below. The current 35 month plunge in its global sales is now nearly twice as long as the downturn in sales during the Great Recession, which was itself a modern record.

Indeed, CAT’s sales during the quarter ended in September had retraced all the way back to the September quarter of 2006. It is as if the massive tide of global capital spending that CAT has been riding since early in this century is heading back out to sea.
CAT Revenue (Quarterly) Chart

CAT Revenue (Quarterly) data by YCharts

In fact, it is. The flip-side of the massive commodities boom since the turn of the century is CapEx.

That is, the tremendous increase in demand for iron ore, copper, zinc, nickel, aluminum and hydrocarbons was mainly driven by a massive one-time build-out of industrial infrastructure for mining, manufacturing, transportation and distribution—–along with related public facilities such as roads, bridges, ports, rails and airports—- in China and the EM.

Even where there were substantial increases in final demand for consumer goods, such as appliances and autos and for the related motor fuels and household electrical power, in both the EM and DM economies, the principle impact was not in the incremental materials and energy consumed by end users, but in the CapEx build out of the production capacity needed to supply them.

Stated differently, CapEx is extremely materials and energy intensive. What drove commodity prices to unprecedented highs earlier this century was a once-in-history CapEx boom fueled by the central bank enabled explosion of global credit.

Likewise, the virulent commodity collapse now underway is a reflection of how far the CapEx cycle overshot the sustainable requirements of the world economy. Iron ore and crude oil heading into the $30s are merely a leading indicator of the deflationary correction now underway.

But the obvious implication that $30 per ton iron ore will batter the global iron ore industry or that $30 oil will shut down the drilling rigs in the shale patch is not the half of it. The whipsaw effect on CapEx is just getting started and it will cascade through the entire warp and woof of the global economy.

As shown below, the publicly listed companies of the world actually increased CapEx by 5X or upwards of $2.5 trillion annually during the run-up to peak capital spending in 2012-2013.  Given the massive over-invest and mal-investment in the world economy, however, the drop ahead could easily amount to well more than $1 trillion annually.

Global Capex- Click to enlarge

Moreover, the gathering CapEx drought will last for years, even decades. That’s because the in-place value of the world’s massive surplus of factories, containerships and heavy mining and construction equipment is now vastly inflated. Accordingly, the market for used equipment and existing capacity will drop so severely that new CapEx orders will be deferred indefinitely.

Zero Hedge provided some examples from the current drastically depressed secondary market for CAT’s big yellow machines. Needless to say, a 99% off sale on existing equipment does not bode well for new orders.

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