Low commodity prices and muted levels of capital investment continue to
constrain results for diversified industrials and capital goods
manufacturers, according to Fitch Ratings.
Most diversified industrials and capital good companies reported sales
declines in the second quarter although the pace of decline moderated
for some companies due to easier year-over-year comparisons. Lower sales
reflect the impact of depressed commodity prices, weakness in emerging
markets and the strength of the dollar. Sales declines are widespread
and have been ongoing for some time, evidenced by a downward trend in
industrial production since the second half of 2014.
Companies selling into commodity-driven end markets such as oil and gas,
mining and agricultural equipment have been the most affected. The heavy
duty truck sector is also down sharply in 2016 as the industry adjusts
to weak freight volumes. In contrast, the automotive, aerospace and US
construction industries have continued to perform well, though low
growth in emerging regions is negatively affecting demand for
construction equipment.
Slower growth in emerging markets will continue to be a drag on
diversified industrial companies for some time. And while growth in
Europe has been a modest support to some companies, the Brexit process
increases risk to demand in the UK and potentially across Europe over
the next year.
Across the diversified industrials sector, Fitch expects sales and
margin weakness will continue into 2017, even as the price of oil and
other commodities show signs of stabilization. There is a risk that an
eventual recovery in these markets could be muted compared with previous
upturns, and Fitch maintains its negative outlook for the diversified
industrial and capital goods sector.
Fitch sees the potential for negative rating actions in 2016, especially
for companies that combine weak operating results with aggressive share
repurchases and acquisitions, leading to higher financial leverage.
Issuers on Negative Rating Outlook include Dover, Kennametal, IDEX and
Harsco. However, most Rating Outlooks are Stable as ratings take into
account underlying cyclicality.
Suppliers to the upstream oil and gas sector will continue to face
significant headwinds over the next year. Oil prices, after recovering
toward $50/barrel in June 2016, have reverted to the low $40 range.
While the number of active drilling rigs could be nearing a bottom, oil
and gas production activity will likely remain depressed well into 2017.
Lower demand for agricultural equipment reflects high crop inventory and
low crop prices, which have led to a significant reduction in net cash
farm income in the US. Cash income could decline further in 2016 to
around $90 billion as projected by the USDA, a level roughly two-thirds
of the record reached in 2012.
Global demand for new mining equipment likely will decline for a fourth
consecutive year in 2016, reflecting sharp reductions in capacity
expansion by mining companies. Mining production has been steady, but
high levels of parked equipment are keeping capital spending for new
equipment below replacement levels. Fitch estimates that Caterpillar's
exposure to mining could result in a cumulative sales reduction that
exceeds the 38% decline in 2009.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include
hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
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