OCTOBER 22, 2010

Latin Demand Buoys Companies

By JAMES R. HAGERTY And PAULO PRADA

Caterpillar Inc. became the latest U.S. company to report a lift from Latin America—underscoring the region's rise as an engine propelling earnings when growth in much of the developed world is distressingly slow.

The heavy-equipment maker, which reported higher-than-expected profit Thursday, is just one of many companies feeling the effects.

Latin America's quick rebound from the global recession is a shot in the arm for many multinational companies struggling for new business in the U.S., Europe and Japan. While its economic clout is no match for China's, the region is emerging as a source of sorely needed industrial demand.

Other big U.S. manufacturers that have seen strong sales in Latin America, particularly Brazil, help boost their quarterly profits and forecasts for the year include Eaton Corp. and Parker Hannifin Corp.

Engine-maker Cummins Inc. expects to more than double its annual sales in Latin America to around $2.2 billion in 2014. CNH Global NV, which makes agricultural equipment under the Case IH and New Holland brands, said Thursday that Latin America accounted for 19% of its third-quarter sales, up from 14% for all of 2009.

Two factors underlie Latin America's economic strength. The first is that, like so many of the world's commodity producers, it is benefiting from China's voracious appetite for raw materials.

"China's growth really drives consumption of commodities, and Latin America benefits from that big time," said Edward Rapp, chief financial officer of Caterpillar, which raised its profit forecast for the year after its earnings nearly doubled in the third quarter to $792 million, largely due to strength in Latin America and Asia.

The International Monetary Fund expects Latin America to post economic growth of 5.7% this year, compared with the 2.7% growth it projects for the world's advanced economies and 4.8% for global growth as a whole.

"Latin American has recovered strongly…led by Brazil, where [inflation-adjusted gross domestic product] growth has been running close to 10% since the third quarter of 2009 and the economy is now showing signs of overheating. A number of other economies have also returned to solid growth. Mexico is lagging, partly because of its strong trade linkages with the U.S," the IMF said in a recent IMF World Economic Outlook

The second factor in the region's strength is that Latin America avoided the worst excesses–such as the complex structured financial instruments–that crippled richer economies during the recent financial crisis. In addition, Latin American policy makers, tested by the region's past economic troubles, steered their way out of the crisis with skill and success.

At Caterpillar, sales in Latin America, its hottest region, surged 95% to $1.76 billion in the third quarter, outstripping increases of 51% in Asia and 55% in North America. Its share of total sales coming from Latin America rose to 16% in the quarter from 12% a year earlier. Asia accounted for about 23% of the company's sales and North America 38% in the latest quarter.

Despite the newfound allure of the region, Latin America as a whole is still a challenging place to invest, given the hodgepodge of legal and regulatory frameworks in place across the region.

Even Brazil, one of the current darlings of foreign investors, presents what many investors consider a confusing and costly array of tax and labor laws, in addition to other red tape.

Brazil ranked 129, well behind other emerging markets, such as China, South Africa and Indonesia, in the World Bank's most recent "Doing Business" survey, which compares countries world-wide in areas ranging from hiring and financial conditions to how easy it is to start a business.

Still, the proceeds from Latin American exports of commodities—such as iron ore, copper and soybeans—are fueling investments in roads, airports and other infrastructure there, and some of the region's economies are growing at rates rivaling China, a situation many foreign companies and investors find hard to resist.

Brazil, the region's biggest economy, is on track to grow 7.7% this year, according to Barclays Capital. Barclays forecasts growth of 10.6% in Argentina, 5.7% in Chile and 8.9% in Peru. That compares with its 2010 growth forecasts of 10.1% for China and 2.8% for the U.S.

Many U.S. manufacturers are bullish on the region. Don Washkewicz, chief executive of Parker Hannifin, a Cleveland-based maker of valves, filters, pumps and other items used in airplanes, trucks and machinery, said in an interview this week that Latin America is "one of our leading regions now as far as growth....It's going to level off, but at a high level."

Earlier this week Eaton, another big Cleveland-based manufacturer, reported surging Latin American demand for heavy-duty trucks and agricultural equipment, for which Eaton makes components.

Latin America's rebound reflects years of efforts by some of the region's governments to adopt more orthodox economic policies to control inflation and government spending.

Though populist economic policies still threaten a handful of the region's economies, notably Venezuela and Argentina, other countries have curbed years of runaway inflation.

Since the mid-1990s, Brazil has slashed public debt, balanced government books and introduced a new currency that trades freely on the open market.

That rapid growth is drawing big inflows of investment. This week, Pfizer Inc. agreed to pay $238 million for a 40% stake in a generic-drug maker in Brazil and took an option to buy the rest of the company.

Earlier in the year, Royal Dutch Shell PLC agreed to invest $1.63 billion to create a joint venture with a Brazilian company for greater access to the country's giant ethanol industry.

Caterpillar recently bought a former truck plant in Campo Largo, Brazil, and is expanding it into a factory that will make backhoe loaders and other construction equipment.

http://online.wsj.com/article/SB2000142 ... s_Page_One