Caterpillar sees steel prices falling in 2019

Caterpillar expects US steel prices to fall in 2019, which should help lower costs for the heavy equipment manufacturer.

Manufacturing costs for Caterpillar increased by $375mn year over year in the first quarter because of higher material costs, freight and variable labor, the company said today.

The costs are expected to come down as steel prices fall, said chief executive Andrew Bonfield on the company's first quarter earnings call.

The Illinois-based yellow goods producer said it paid $70mn in tariff costs in the first quarter, and it expects financial impacts from tariffs through the second quarter of 2019. Caterpillar said its procurement practices mean there is a lag in how the tariffs impact it.

Caterpillar believes the US economy will remain healthy as state and local infrastructure spending increases, partly offset by weakness in the residential construction market.

A lack of pipeline capacity out of west Texas' Permian Basin oil field is crimping demand for Caterpillar's well servicing equipment. But as pipelines out of the region come online in 2019 the company expects well-servicing demand to ramp back up. Apache, a major natural gas producer in the Permian Basin, recently curtailed natural gas production because of low prices at the Waha Hub in west Texas.

First quarter sales in Caterpillar's North American segment rose to $6bn, a 7pc rise from the first quarter of 2018.

The North American sales increases were led by growth in the construction segment, which rose by 13pc to $2.97bn from $2.62bn a year before, and resource industries, which grew by 19pc to $951mn from $798mn.

Sales for the first quarter in the energy and transportation segment fell by 3.3pc to $2.15bn from $2.23bn in the prior year.

The company posted record first quarter profits of $1.88bn, up by 13pc from the first quarter of 2018.