It's being characterised as the worst natural disaster to strike the world's most populous country in three decades and it has left an estimated 5 million people homeless.
So will the earthquake that devastated China's Sichuan Province earlier this month-and the massive reconstruction to follow-improve the sales of construction equipment makers like Caterpillar Inc, Terex Corp, Komatsu Ltd, Deere & Co and others?
Not as much as some investors might expect, say industry analysts who argue that the effects of natural disasters do not alter overall sales trends. "It's probably going to move the needle a little bit, but not a lot," said Donald Straszheim, the former chief economist at Merrill Lynch and a long-time China specialist who now serves as vice chairman of Roth Capital Partners in Newport Beach, California.
In the days following the May 12 earthquake, which measured 7.9 on the Richter scale, television news coverage has often featured shots of bulldozers, cranes and other heavy equipment with familiar corporate logos involved in emergency efforts. Asking what companies might benefit from the disaster is an awkward but natural question for many investors.
As the Chinese rebuild the hospitals, schools, dams, roads, power grids, telecommunication systems and other critical infrastructure flattened by the earthquake, who will benefit?
In the aftermath of Hurricane Katrina, which battered the US Gulf Coast in 2005, a host of companies reported stronger sales as communities rebuilt, including trailer maker Fleetwood Enterprises Inc, generator-maker Briggs & Stratton Corp, home improvement retailers Home Depot Inc and Lowe's Companies, and building restoration company Munters AB. But Alex Blanton, an analyst at Ingalls and Snyder who has covered machinery makers like Caterpillar since the 1970s, says there is almost never an investment play to be had from natural disasters.
"Earthquakes and other natural disasters almost never cause much of a change in the trend or magnitude of overall equipment sales," Blanton said. "The effects are almost always too small to detect or measure and, in any case, of short-term duration."
DONATIONS EMPHASIZED:
The companies themselves generally go to great pains to downplay profits they might make as a result of the misery, preferring instead to focus on their donations to the rescue and recovery efforts. Terex sent cranes manufactured at its joint venture plant in Luzhou, China to earthquake area.
Dow Chemical sent water treatment units and Styrofoam, that company spokesman Chris Huntley said makes a surprisingly comfortable temporary bed. And Caterpillar sent hydraulic excavators, heavy machinery operators and mobile power generators into the region and gave $550,000 to the Red Cross and the World Food Program.
"Our focus is on the recovery in China," says Kathryn Spitznagle, a spokeswoman for Caterpillar, which saw its Chinese sales increase 50 percent last year to $1.5 billion and hopes to at least double them again by 2010. "While we didn't have any employees killed, there were folks who were their friends and family, and so right now our heart is with those people and our focus is 100 percent on supplying our equipment where it's needed most, and that's in the recovery," she said.
But Andrew Liveris, chief executive of Dow Chemical, which also donated $286,000 to support relief efforts in the immediate aftermath of the quake, was quite open about the opportunities that could come from the disaster.
"This earthquake is going to create a whole lot of new demand," Liveris told last week's Goldman Sachs Basic Materials Conference in New York. "It's a sad story. But China will mobilise and spend a whole lot on new infrastructure for poorer parts of China," said Liveris, whose company makes, among other things, water treatment products and building materials. But whether that spending-on everything from structural steel to cement and the equipment needed to haul it-will change the profit outlook for Western companies is debatable.
Much of the spend, Straszheim predicts, will wind up going to local companies as authorities pursue "a buy China" policy. What is more, the demand for steel products to reinforce new buildings will exert "some upward push on commodity prices." That could hurt Western equipment makers who use massive amounts of steel in their products.
Global steel prices are already up 40 percent since the beginning of the year and the pressure is showing up in the results of companies like Caterpillar and Deere. Finally, as large as the rescue and recovery effort in Sichuan is likely to be, Straszheim says it is dwarfed by China's huge investment in infrastructure-a push that has already lifted the sales and profits of the equipment makers.
"They're building, basically, an interstate highway system," he says. "They're building a rail grid. They're building subways, airports, seaports, sewer systems, water systems, and electric power grid."
Against that backdrop of massive spending, the current effort in Sichuan, Straszheim predicts, will, in time, be a blip. "In our opinion, five years from now, investors will look back at the overall China data and won't be able to decipher either the year or the quarter when the earthquake hit."
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