(Reuters) – Caterpillar Inc on Thursday warned that demand for excavators in China, one of its largest markets, could slip below pre-pandemic levels in 2022, as construction activity takes a hit in the country from strict pandemic lockdowns.
Shares of the Deerfield, Illinois based-company fell 3% to $207 in afternoon trade, as analysts expressed disappointment over the company’s current-quarter margin forecast.
“The 10-ton and above excavator market in China was very strong in 2020 and 2021. We now anticipate this market will be slightly lower than 2019 levels (this year),” Caterpillar Chief Executive Officer Jim Umpleby said on a post-earnings call.
China’s “zero Covid” policy to combat the Omicron variant has triggered fresh lockdowns, shutting factories and hurting sales of companies such as General Electric Co and 3M Co in the first quarter.
The stringent policy also hit Caterpillar, which gets about 5-10% of its total revenue from the country.
“The lockdowns could weigh on CAT results in China in the second quarter,” Edward Jones analyst Matt Arnold said.
The company, however, benefited from demand else where. Sales rose across all other regions, with the exception of Asia-Pacific, buoyed by price hikes as well as higher mining and construction activity.
“Mining activity will continue to increase,” Caterpillar Chief Financial Officer Andrew Bonfield said in an interview.
Total operating costs in the first quarter rose 16.5% to $11.73 billion.
The company has managed supply-chain challenges and higher input costs by announcing price hikes. Caterpillar continues to expect the increased prices to more than offset higher manufacturing costs this year.
Adjusted profit for the latest period was $2.88 per share, beating average analysts’ expectation of $2.60 per share.
Revenue rose about 14% to $13.59 billion, beating expectations of about $13.4 billion.
(This story corrects paragraph 10 to remove reference to “further price increases”. Adds the company expects announced price increases to offset higher manufacturing costs)
(Reporting by Aishwarya Nair and Abhijith Ganapavaram in Bengaluru and Bianca Flowers in Chicago; Editing by Anil D’Silva)