Komatsu’s Profit Decline Shows Mining Slowdown Trumps Yen

Komatsu Ltd. (6301)’s decline in first-quarter operating profit shows a lower yen and growth in Japan aren’t enough to overcome weakness among its customers, threatening a strategy built around boosting margins through sales of more expensive mining equipment.

A sales slowdown among mining companies “reflects the reliance on emerging markets, including China,” said Yoku Ihara, an investment advisor at Retela Crea Securities Co. in Tokyo. “The impression is bad, compared with the strong profit growth for carmakers.”

Komatsu, the world’s second-biggest construction-equipment maker, yesterday said operating profit fell 5.9 percent to 52.4 billion yen ($535 million) in the three months ended June 30, from 55.7 billion yen a year earlier. That compares with the 61.7 billion yen estimate of five analysts in a Bloomberg survey. Net income rose 16 percent, aided by lower tax payments.

Falling commodity prices have reduced mining activity in Indonesia and Latin America, cutting into Komatsu’s sales of high-margin mining equipment. The weakening of the yen and increased spending on construction projects in Japan failed to cushion the overall decline.

Komatsu shares closed up 1.3 percent at 2,192 yen in Tokyo Stock Exchange trading after earlier falling as much as 72 yen, or 3.3 percent. The Nikkei 225 Stock Average rose 1.5 percent.

Yen Declines

Revenue for the quarter fell 3.1 percent to 455.2 billion yen. Sales from mining equipment, including dump trucks and excavators, dropped 17 percent to 130 billion yen, the company said in a presentation yesterday.

Rio Tinto Group, one of Komatsu’s biggest mining customers, said yesterday that it’s delaying work on a $5.1 billion underground expansion of its Oyu Tolgoi copper mine in Mongolia

While demand from mining companies remains tough, sales of Komatsu’s mining equipment aren’t likely to decline further after hitting bottom in the first quarter, Katsushi Saito, an analyst at Nomura Securities Co., said today in a report. Operating profit is expected to recover from the past quarter, aided by the weakening of the yen, the report said.

The yen has declined about 13 percent since Prime Minister Shinzo Abe took office on Dec. 26, the most among the Group of 10 currencies. The currency today traded at 98.3 yen to the dollar as of 3:20 p.m. in Tokyo.

Abenomics

“The outlook for mining equipment is uncertain” with a risk that demand will further decline, said Shinji Kuroda, an analyst at Credit Suisse Securities Japan Ltd. “The company would have to make up for the slide of mining equipment by sales of components and gains from the currency.”

Abe’s economic measures are expected to boost domestic demand, already spurred by Japan’s spending on the reconstruction of areas wrecked by an earthquake and tsunami in 2011, Komatsu President Tetsuji Ohashi said on June 26.

For the first quarter, an increase in construction projects in Japan and recovering sales in the U.S. and China failed to offset declines in regions including Southeast Asia and Latin America, according to the company’s presentation.

Lower commodity prices and a reluctance to embark on new investment are behind the slide in sales from miners, Akira Sugiki, senior executive officer at Komatsu, told analysts and investors yesterday during a conference call.

Hitachi Construction Machinery Co. (6305), Komatsu’s closest domestic rival, said yesterday that first-quarter operating profit fell 28 percent to 9.6 billion yen after sales of mining equipment declined and demand for construction equipment in India fell. The shares fell 3 percent to 1,973 yen in Tokyo.

Regional Sales

Komatsu’s Japanese sales from construction equipment rose 6.3 percent to 66.4 billion yen, accounting for 16 percent of global sales. North America revenue increased 6 percent to 65.6 billion yen; China edged up 1.7 percent to 41.4 billion yen.

Sales in Asia outside Japan and China dropped 39 percent to 47.9 billion yen, the biggest decline by region. Sales in Latin America fell 6.2 percent to 59.4 billion yen.

Caterpillar Inc., the world’s largest construction equipment maker, last week cut its earnings forecast and posted profit that trailed analysts’ estimates for a third straight quarter as mining-equipment sales declined on slower commodity demand from emerging markets.

Komatsu left its full-year forecasts for operating profit and net income at 305 billion yen and 184 billion yen respectively, yesterday’s statement said.

To contact the reporters on this story: Masumi Suga in Tokyo at msuga@bloomberg.net; Ichiro Suzuki in Tokyo at isuzuki@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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