July 18 (Bloomberg) -- Upbeat comments from Swedish mining-equipment makers Atlas Copco AB and Sandvik AB may be an early sign of a recovery for a business that’s been in a two-year decline as customers postponed investments amid slumping commodity prices.
“The downward pressure that we have experienced for quite some time is not there in the same way,” Sandvik Chief Executive Officer Olof Faxander said on a conference call with journalists yesterday. “There is stability at the current level, and that is a positive change.”
Faxander’s comments echo those of Ronnie Leten, CEO of Stockholm crosstown rival Atlas Copco, who said on July 16 he’s seen an improvement in demand for mining products late in the second quarter.
After a surge in mining investments, fueled by a decade-long boom in metal prices, BHP Billiton Plc, Rio Tinto Plc and Vale SA are cutting investments, favoring cash handouts to shareholders instead. BHP, the world’s largest mining company, expects spending on new projects and exploration to have been $16.1 billion in fiscal 2014, 25 percent lower than in the previous year, and Rio Tinto last year lowered its capital expenditure by 26 percent to $12.9 billion.
“The fact that both CEOs feel a bit happier talking about it as a little more positive trend is clearly helpful, and it’s probably a bit earlier than I thought,” Alexander Virgo, an analyst at Berenberg in London, said in an interview. “We ought to be somewhere near the trough.”
A 3 percent drop in second-quarter orders marked the slowest annual rate of organic decline in two years for Sandvik’s mining unit.
Virgo said that it is encouraging that a stabilization is finally materializing. Although miners’ production rates have been good for some time, it hasn’t translated into stronger demand for products from Atlas Copco and Sandvik, he said.
While miners are unlikely to ramp up investments in expansions, machinery makers could benefit from growing service and spare parts sales as well as equipment-replacement orders.
Mining industry sales represented 37 percent of Sandvik’s total revenue last year, while Atlas Copco generates about 26 percent of sales from mining customers. Together, the two Swedish companies control more than half of the global market for underground mining equipment. Their competitors include U.S.-based Joy Global Inc. and Caterpillar Inc.
Atlas Copco’s Leten said his prediction for the mining industry has gone from flat with a negative slant, to flat with a positive slant, in the last three months.
“The general feeling is that it’s more positive,” Leten said on a conference call. “There’s much more optimism on the mining side than three months, four months ago. For the time being, I see that we have reached the bottom.”
Leten said optimism was mainly driven by the development in Australia, Latin America and North America, while exploration activities are still a long way from recovery.
Sandvik’s orders for equipment like rock-drilling tools, drill rigs and crushers from the mining industry have been in decline since mid-2012, and sales at its mining unit were 35 percent lower in the second quarter than two years earlier.
Shares of Sandvik, which has a bigger exposure than Atlas Copco to the coal market, have underperformed those of its peer, which derives most of its mining sales from copper and gold miners. Sandvik has declined 2.4 percent so far this year in Stockholm trading, while Atlas Copco has gained 19 percent.
Sandvik’s Faxander said he wasn’t prepared yet to predict a near-term improvement in mining demand, though the future growth prospects are good.
“When we adapt costs we need to be mindful not to take measures that will impend our opportunities when the market recovers,” he said.
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