Construction Equipment, Tractor Sales Lag in China, India (CAT, DE)

Slowing global economic growth is cutting into sales of heavy construction and farming equipment in what were the world’s fastest growing markets: China and India. The impact on U.S. makers like Caterpillar Inc. (NYSE: CAT) and Deere & Co. (NYSE: DE) could be profound.

For Caterpillar, output has been cut at the company’s Chinese plant and equipment originally intended for the Chinese market is being exported in an effort to draw down inventory. A company spokesman is cited by Bloomberg:

The current sales level in China is quite depressed. We ended up with more inventory in China than we needed and it’s probably going to take us the rest of the year to work it down.

The Chinese slowdown first hit the construction industry and is now affecting sales to mining companies as well. An analyst at Nomura has said that the mining slowdown has just started and “may last longer than the market expects,” while predicting a 27% drop in sales of excavators.

Excavator sales are tanking for all manufacturers, not just Caterpillar, with total sales down 24% in the past 12 months and have dropped year-over-year in every month since May 2011 according to the Bloomberg report.

In India, the world’s largest tractor maker, Mahindra & Mahindra, has cut its sales forecast to the lowest level in four years as drought conditions have led to delays in sowing crops. The company expects tractor sales to grow by just 2%, down from an estimated growth rate of 10% earlier this year.

When it reported earnings earlier this month, Deere said that sales in China and India would be moderately lower. Fortunately for Deere, it’s exposure in China is relatively modest compared with Caterpillar’s. But the lack of rain in India is forcing Mahindra and other Indian makers to export tractors to make up for the weak demand in the country.

Caterpillar’s shares are down about 0.5% in premarket trading this morning, at $87.20 in a 52-week range of $67.54 to $116.95.

Deere’s shares are inactive in the premarket, and closed yesterday at $76.12 in a 52-week range of $59.92 to $89.70.

Paul Ausick