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Aug 2 (Reuters) – Caterpillar Inc (CAT. N) on Tuesday warned of a bigger drop in demand for its excavators in property crisis-hit China, piling upon more pain on the industrial bellwether grappling with supply-chain disruptions.

Shares of the Dow component fell as much as 5. 5% as the heavy equipment maker missed quarterly sales expectations and its margins shrank amid rising costs.

China’s highly leveraged property market, a key pillar of the world’s second-largest economy, has weakened sharply as homebuyers threaten to stop paying mortgages on hundreds of unfinished housing projects.

Caterpillar on Tuesday predicted that demand for above-10 tonne excavators would drop further in China, which typically accounts for 5% to 10% of its overall revenue. It had said within April the equipment’s sales could slip below pre-pandemic levels in 2022. read more

Weakness in China, also due to coronavirus-related curbs, dragged Asia/Pacific construction equipment product sales by 17%, while overall equipment revenue in Europe, Africa and Middle East dropped 3%.

Meanwhile, quarterly operating margin shrunk in order to 13. 6% from 13. 9% last year as lower volumes and high costs nibbled into profit.

“We continue to incur additional costs because of factory inefficiencies and freight expenses, ” CEO Jim Umpleby said, adding that tackling supply-chain hurdles is a “hand-to-hand combat”.

Caterpillar, which usually raised prices last year, said it expects higher equipment costs to “more than offset” an increase inside manufacturing cost this year.

“(Caterpillar) expects adjusted operating income margin to be able to improve in the back half. So that will implies that pricing eventually catches up with price inflation, inch Edward Jones senior analyst Matt Arnold said.

The company’s total revenue rose about 11% to $14. 25 billion, but missed the analysts’ average estimate of $14. 35 billion.

Adjusted revenue rose for you to $3. 18 per share, above expectations of $3. 01, according to Refinitiv data

Reporting by Abhijith Ganapavaram throughout Bengaluru plus Bianca Flowers in Chicago; Editing by Arun Koyyur

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