Why Caterpillar can’t keep up with a boom in demand

A worker pours molten iron into molds to form parts for Caterpillar Inc. and other industrial customers at Kirsh Foundry Inc. in Beaver Dam, Wisconsin, U.S., April 12, 2018. REUTERS/Timothy Aeppel

By Timothy Aeppel and Rajesh Kumar Singh

EAST PEORIA, Ill. (Reuters) – Orders for the mining machines and construction bulldozers made at this sprawling Caterpillar Inc. factory in central Illinois have jumped, in general, three-fold over the past year.

But meeting that boom in demand at the world’s largest heavy equipment manufacturer is a challenge, in part because of Caterpillar suppliers like Steve Kirsh.

Years of watching Caterpillar and other big manufacturers cut inventories, close plants and axe workers in the last downturn has embedded caution in Kirsh’s ambition to expand after the surge in orders, reflecting a more fundamental shift in how many industrial businesses view expansions, according to interviews with Caterpillar executives, more than a half-dozen Caterpillar suppliers and U.S. economic data.

“I just wasn’t sure it was real,” said Kirsh, speaking from a windowless office at the front of Kirsh Foundry Inc., in Beaver Dam, Wisconsin, which makes metal parts for Caterpillar and other customers.

Even with a surplus in demand for its product, Caterpillar CEO Jim Umpleby told investors last month the company will not invest in factory capacity. Instead, it plans to spend more on new technologies, expanding its parts business and selling more rental and used equipment.

The company’s big East Peoria assembly plant runs just one shift and operates only four days a week, while its own parts-making facilities are running three shifts, five days a week to provide it enough components to assemble, according to the company officials. Outside suppliers are similarly scrambling to catch up to the surge in orders.

This has extended the lead-time to deliver final products to dealers. For instance, it takes more than eight months to get one model of its large engines into a customer’s hands.

The Trump administration’s efforts to rewrite trade relations with key partners, especially China, only add to the uncertainty. The latest move to step back from a confrontation with China is good news for many domestic producers, who worry that a trade war could quickly puncture the global expansion, going on nine years, which is feeding the U.S. factory boom, manufacturing executives told Reuters.

The result is a drag on the economic expansion that President Trump and Republicans hoped for coming off U.S. corporate tax reform last year. The idea behind Trump’s tax reform was that companies could pour more money into expansions, hire more workers and lift wages.

There has been an upswing in plans for capital spending, but much of it is concentrated in the technology and energy sectors. Spending plans by industrial companies are up only slightly.

For those companies that do want to expand, from car companies to railroads and engine makers, they often can’t find the workers to expand fast enough.

The contraction of their supply chain in the last downturn thrust many players big and small into a “just in time delivery” business model, creating order backlogs, which has led to soaring prices for raw materials in the recent upswing. For a graphic, click https://tmsnrt.rs/2rY3iZp

A worker checks parts he has cut into final shapes at Wolfe and Swickard Machine Company Inc. in Indianapolis, Indiana, U.S., April 10, 2018. REUTERS/Timothy Aeppel

A worker checks parts he has cut into final shapes at Wolfe and Swickard Machine Company Inc. in Indianapolis, Indiana, U.S., April 10, 2018. REUTERS/Timothy Aeppel


The hesitation to expand Caterpillar’s supply chain is rooted in the last bust, notable as the longest downturn in its history – worse than the Great Depression – from 2012 to 2016, when sales dropped more than 40 percent.

Chastised by that slump, the Deerfield, Ill.-based company embarked on a restructuring strategy that aims to squeeze more production from its factories and buy more of what it needs from outside suppliers on a just-in-time basis.

Caterpillar has closed or restructured more than 25 factories and its full-time workforce is smaller now than it was at the end of 2012. And cuts continue. Caterpillar plans to close two more facilities this year and is considering shuttering an engine plant, which would eliminate 880 jobs.

Caterpillar executives said the new strategy is boosting profitability by allowing it to get the best use out of its existing factories. They blame the backlogs on its suppliers’ inability to keep up with the surge in orders.

Timing is part of the problem. Caterpillar and a host of other industrial companies all ramped up orders at the same time. “That switch got turned on after being turned off for several years – all at the same time,” said Amy Campbell, director of investor relations.

Campbell, however, said the supply situation is improving. The central Illinois plant will go back to the normal five-day shift beginning in June.

Caterpillar’s investors love this approach, since it helps deliver strong margins in the good times and minimizes pain in bad times.

The company recently boosted profit projections for 2018 by about 25 percent, and in the latest quarter, every segment posted better results compared to a year ago. But its stock price took a hit when the company’s CFO warned higher prices for raw materials like steel are going to start squeezing margins even as growth continues.

Supply chain bottlenecks, meanwhile, are hitting companies across the industrial heartland.

The Institute for Supply Management’s index for order backlogs, one of the best U.S. metrics for how quickly manufacturers are meeting demand, now stands at its highest level in 14 years. And many companies remain tight fisted. The Commerce Department recently reported that orders for capital goods, a key measure of business investment, fell in March, the third decline in four months. These numbers show that companies are holding back on spending, even as their order books swell.

“We’re in a period of significant disruption where everyone is scrambling — but it’s the way supply chains work today,” said John Layden, a consultant in Indianapolis who helps companies design and manage supply networks.

Finished castings coming off the production line at Kirsh Foundry Inc. in Beaver Dam, Wisconsin, U.S., April 12, 2018. REUTERS/Timothy Aeppel

Finished castings coming off the production line at Kirsh Foundry Inc. in Beaver Dam, Wisconsin, U.S., April 12, 2018. REUTERS/Timothy Aeppel


Finding employees is another drag on the U.S. manufacturing supply chain.

When Kirsh decided to add people early last year at his foundry – which melts iron and forms it into the rough shapes that will be refined for Caterpillar and others – he could not find them. Wisconsin’s jobless rate has hit an all-time low of 2.8 percent.

So Kirsh tried something new, hiring a Minnesota staffing company that specializes in parachuting industrial workers into factories that can’t find them locally.

He eventually got about 10 of these workers, who he calls “mercenaries,” who helped get his backlog under control. One came from as far as away as Detroit. But it was a costly fix. Between paying the staffing company, hotels and a per diem for the workers, he estimates they cost about three times more than local labor.

Industrial companies have always struggled with big swings in demand, but the problem of shortages emerges much quicker in today’s super-lean economy.

In the past, manufacturers from Kirsh to Caterpillar often kept more goods on warehouse shelves, creating a built-in buffer that could be absorbed as signals went out to suppliers that the latest upturn is going to continue. That gave more time for everyone to gear up.

It is a luxury that does not exist anymore, said Joe Williams, president of privately-held Wolfe and Swickard Machine Company Inc. in Indianapolis, which buys forged parts from Kirsh and over 20 other foundries that his 85-worker shop shapes and polishes into final machine parts.

Early last year, Williams saw orders from Caterpillar surge 80 percent, a stunning increase that left him scrambling.

“When we get an order, we have to order from a foundry, which has to communicate with the people supplying them metal, so there’s always a lag,” he said.

This time, however, it was particularly difficult. Some foundries simply refused his business because they were swamped with orders from other customers.

Like Kirsh, Williams has had trouble hiring workers and said he still needs at least 15 more machinists. Caterpillar has told him to expect orders to go up another 20 percent this year.

Stephen Volkmann, a machinery industry analyst at Jefferies, said Caterpillar was slow to ramp up production – which frustrated dealers clamoring for machines they could sell.

But he said Caterpillar and its suppliers are smart to be cautious.

“They all know that (business) could be down again next year,” he said, and so over expanding now “would be an expensive mistake.”

(Reporting by Timothy Aeppel and Rajesh Kumar Singh; editing by Joe White and Edward Tobin)

U.S. gasoline prices tumble as Harvey subsides

A pump jack is seen at sunrise near Bakersfield, California October 14, 2014. REUTERS/Lucy Nicholson/File Photo

By Ron Bousso

LONDON (Reuters) – Benchmark U.S. gasoline prices slumped on Monday to pre-Hurricane Harvey levels as oil refineries and pipelines in the U.S. Gulf Coast slowly resumed activity, easing supply concerns.

Brent crude oil futures were flat at $52.75 by 1340 GMT, paring earlier losses after a powerful North Korean nuclear test triggered a shift away from crude markets to assets perceived to be safer, such as gold.

U.S. West Texas Intermediate crude futures, however, were up 34 cents at $47.63 barrel as U.S. demand, hit by reduced refinery activity since Harvey made landfall on Aug. 25, recovered.

NYMEX gasoline futures were down 3.2 percent at $1.6916 a gallon, levels last seen on Aug. 25, the day Harvey struck, crippling production and causing widespread flooding.

Still, damage to the oil infrastructure in the Gulf Coast hub by Harvey appeared less extensive than some had feared.

Harvey has now been downgraded to a tropical storm.

A number of major refineries, which convert crude oil into refined products such as gasoline and jet fuel, as well as distribution pipelines, were gradually resuming operations on Monday.

Valero Energy’s 225,000 barrels per day (bpd) Texas City refinery was the only plant reported to be running at normal rates so far.

At the same time, about 5.5 percent of the U.S. Gulf of Mexico’s oil production, or 96,000 barrels of daily output, remained shut on Sunday, down from a peak of more than 400,000 bpd last week.

“The disruptions from Hurricane Harvey in the U.S. Gulf Coast are gradually clearing. In the broader scheme of things, it appears that so far the energy industry was spared major damages to assets and infrastructure,” analysts at Vienna-based JBC Energy said in a note.

“However, some Houston area refineries will likely remain offline for some time longer.”

Traders booked dozens of gasoline tankers over the past week from Asia and Europe to the United States and Latin America in order to plug supply shortages in the wake of the shutdowns.

European gasoline refining margins dropped by nearly a fifth on Monday.

And while the U.S. government tapped its strategic oil reserves for the first time in five years last week, the head of the International Energy Agency (IEA) said the global energy watchdog still sees no need for a coordinated international release of oil stocks after Harvey.

Texas Governor Greg Abbott estimated damage at $150 billion to $180 billion, calling it more costly than Hurricanes Katrina or Sandy, which hit New Orleans in 2005 and New York in 2012 respectively.

Traders were nervously watching developments in North Korea, where the military conducted its sixth and most powerful nuclear test over the weekend. Pyongyang said it had tested an advanced hydrogen bomb for a long-range missile, prompting the threat of a “massive” military response from the United States if it or its allies were threatened.

That put downward pressure on crude as traders moved money out of oil – seen as high-risk markets – into gold futures traditionally viewed as a safe haven for investors. Spot gold prices rose for a third day, gaining 0.9 percent on Monday.

Overall trading activity in the oil futures market was expected to be low on Monday due to the U.S. Labor Day public holiday.


(Additional reporting by Henning Gloystein in Singapore; Editing by Louise Heavens)


Oil down 1 percent; first U.S. crude build in six weeks above expectations

A worker checks the valve of an oil pipe at the Lukoil company owned Imilorskoye oil field outside the West Siberian city of Kogalym, Russia,

NEW YORK (Reuters) – Oil prices fell more than 1 percent on Thursday after U.S. government data reported the first domestic crude inventory growth in six weeks, a build above market expectations.

Brent crude was down 66 cents, or 1.3 percent, at $51.15 per barrel by 11:09 a.m. EDT (1609 GMT).

U.S. West Texas Intermediate (WTI) crude fell 65 cents, or 1.2 percent, to $49.53.

The Energy Information Administration (EIA) said U.S. crude stocks rose by 4.9 million barrels in the week ended Oct. 7. Analysts polled by Reuters had forecast a more modest build of nearly 700,000 barrels. [EIA/S]

(Additional reporting by Ahmad Ghaddar in LONDON and Henning Gloystein in SINGAPORE; Editing by Bill Trott and Chizu Nomiyama)

After shoddy China economic data, Xi says to persevere with reform

Xi Jinping

BEIJING (Reuters) – China will push forward supply-side reform and increase the number of middle-income earners, state television quoted President Xi Jinping as saying on Monday, after economic data for April fueled doubts about the economy’s health.

Xi’s speech to a meeting of top government economic regulators underscores the importance, and pressure, of managing China’s economic shift as growth has cooled to 25-year lows.

Investment, factory output and retail sales in the world’s second-largest economy all grew more slowly than expected in April.

The main thrust is to reduce ineffective supply and increase effective supply, Xi said, according to the official Xinhua news agency.

The government has made reducing the capacity glut one of its top priorities, and has vowed to put “zombie” companies out of business. But economists expect authorities to move slowly to avoid a sharp jump in unemployment.

In some regions there had not been forceful action on government policies, Xi was quoted as saying by Xinhua. At the same time, some policies need to be further researched and drawn up.

For the state and society to remain stable over the long-term, the government must realize its goal of meeting people’s needs and expanding the number of middle-income earners, he said.

China must push forward reform of state-owned enterprises, accelerate change in how government functions and deepen the fundamental reforms of pricing, taxation, finance and social insurance, said Xi.

The government must also improve China’s income distribution system and strengthen people’s property protections, he said.

Separately, China’s State Council plans to encourage private investment, a major foundation of a stable economy, in part by removing hidden barriers, Xinhua said on Monday.

To that end, the State Council will send teams to government departments and provincial governments to inspect progress on promoting private investment, said Xinhua.

(Reporting by Beijing Monitoring Desk, Elias Glenn and Paul Carsten, Editing by Ed Osmond)

U.S. crude hits six-month high after IEA sees tighter supply

A natural gas flare on an oil well pad burns as the sun sets outside Watford City,

By Sarah McFarlane

LONDON (Reuters) – U.S. oil prices hit a six-month high on Thursday, supported by data from the International Energy Agency (IEA) showing tightening supply, in addition to a surprise drop in U.S. crude inventories.

West Texas Intermediate (WTI) U.S. crude futures <CLc1> were 58 cents higher at $46.81 at 1213 GMT, having earlier peaked at $46.92, their highest since Nov. 4.

Brent crude futures <LCOc1> were trading at $48.00 per barrel, up 40 cents from their last settlement and near a six-month high of $48.50 hit at the end of April.

“The catalyst for the rally today seems to have been the IEA report where they have said production is going to fall faster and demand is going to rise more strongly than we previously thought,” Tom Pugh, commodities economist at Capital Economics said.

The IEA on Thursday raised its 2016 global oil demand growth forecast to 1.2 million barrels per day (bpd) from its April forecast of 1.16 million.

It also noted that output from Nigeria, Libya and Venezuela is down 450,000 bpd from a year ago.

Analysts said that while the IEA data was helping to support prices, the gradual return of Canadian oil sands output and the expectation that prices are nearing levels that could trigger the return of some U.S. production might cap gains.

“The only thing that could throw a spanner in the works to prevent oil from rallying further would be the (U.S.) production,” said Ole Hansen, head of commodities research at Saxo Bank.

Traders said an expected increase in Canadian oil sands output following disruptions to over 1 million barrels of daily production capacity due to a wildfire was weighing on markets.

The U.S. Energy Information Administration (EIA) said on Wednesday that U.S. crude inventories fell by 3.4 million barrels to 540 million barrels last week, surprising analysts who had expected an increase of 714,000 barrels.

“With (refinery) runs recovering and production dropping, U.S. (crude) stocks should begin drawing steadily from now,” consultancy Energy Aspects said on Thursday.

“We estimate that North American inventories can fall by as much as 12 million barrels across May and June,” it said.

Kuwait’s acting oil minister said that recent price rises were fundamentally justified.

“Based on the decrease in production that has been shown in the last three weeks, I assume fundamentally the price represents the fall of production,” Kuwait’s Anas al-Saleh told Reuters on Thursday.

He also said that the Organization of the Petroleum Exporting Countries (OPEC), of which Kuwait is a member, would not seek price supporting market intervention during its next scheduled meeting on June 2, and instead it would focus on dialogue between its members.

At an April meeting, rivals Saudi Arabia and Iran could not agree on deal terms, triggering criticism that the producers’ cartel had lost its ability to act.

(Additional reporting by Henning Gloystein in Singapore and Osamu Tsukimori in Tokyo; editing by William Hardy and David Evans)