Global Trade Collapse Smacks Industrial Companies

World trade is declining at the fastest rate since the Great Depression, causing many industrial companies to struggle

By Ben Steverman

The world's shipping lanes are less crowded and barge hulls are emptier. According to World Bank forecasts issued on Mar. 31, the volume of world trade in goods and services will drop 6.1% this year, the biggest decline in 80 years.

The impact of this global trade collapse is being felt everywhere. Feeling the squeeze are not just shipping firms, but also paper mills to industrial firms to coal miners.

For investors, the surprisingly rapid decline in trade is contributing to the recent sell-off in equities. Earnings estimates are being slashed at much-admired industrial firms. Companies once fashionable with investors are fighting the threat of bankruptcy. And, industries that once commanded peak prices from customers are now forced to slash production.

Ingersoll-Rand Warns on Q1

The most recent examples of industrial earnings in free fall come from Manitowoc (MTW) and Ingersoll-Rand (IR). While both companies are hurt by the U.S. slowdown, the two industrial conglomerates are also feeling the heat from abroad. Both spent years trying to exploit rapid growth and an infrastructure buildout in emerging economies.

Now, Ingersoll-Rand warns that first-quarter revenues could fall 25% to 27% from a year ago. Also on Mar. 31, the maker of air conditioning and security systems slashed its dividend from 18¢ per share to 7¢, a move aimed at saving $140 million per year.

One of Manitowoc's main products is construction cranes, and it benefited from rapid building in China, the Middle East, and elsewhere. On Mar. 30, Manitowoc warned first-quarter earnings could be less than half of analysts' consensus estimates. "Global demand for the company's crane products has not stabilized and continues to decline further than previously anticipated due to the continuing global recession," the Wisconsin-based company said in a statement.

Crane Order Cancellations

The World Bank expects the world economy to shrink 1.7% in 2009. That's the first global decline in output since World War II. Adding to the stress on global trade is the credit crisis. R.W. Baird analyst Robert McCarthy notes the credit crisis directly hurt Manitowoc, with "reduced global credit availability…constraining new nonresidential building projects and driving crane order cancellations."

Many analysts assumed the busy trade traffic of 2007 and early 2008 would continue into 2009 and beyond. Some of the unluckiest companies borrowed money based on those assumptions. DryShips (DRYS), a Greek shipping outfit that trades on the New York Stock Exchange, "took on way too much debt," says Dahlman Rose, head of research at Omar Nokta. At a time when ships were in hot demand, "they were buying a lot of ships at peak prices."

On Mar. 30, DryShips' auditors said they doubted if the shipper could meet all its obligations to debtors. In response to its credit problems, DryShips has been issuing new equity shares, diluting current shareholders' stakes. A stock that traded above 100 last May, DryShips closed on Mar. 31 at 5.09.

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