Metals Slump Challenges Nordic Mine Toolmakers' Last Resort

  • Equipment services at Atlas, Sandvik may come under pressure
  • Miners like Glencore see potential for lower supplier prices

As the world’s biggest mining companies curtail spending at pits from Australia to Brazil, their battle to survive a commodities price collapse is reverberating across Nordic countries, where equipment makers may have played their last card.

Sandvik AB and Atlas Copco AB, both based in Stockholm, and Metso Oyj of Finland are among the top six global suppliers of heavy tools used for drilling, crushing and excavating rock. With the mining industry in decline, they moved to replace faltering sales of new equipment with lucrative service contracts for maintenance and repair.

Now, even that business is slowing as miners including BHP Billiton Plc, Rio Tinto Plc and Glencore PLC deepen cost cuts and move to sell sites. Their hunkering down comes as iron ore, copper and nickel prices have sunk to lows not seen since the 2009 financial crisis.

“Mining companies have a tough time, and mines are being closed,” Sandvik Chief Executive Officer Bjoern Rosengren said in a phone interview this month. “As soon as they decommission their equipment, there are fewer machines to service.”

A strong engineering tradition and challenging geology helped spawn a cluster of Nordic mining-equipment companies that are now world leaders in their fields. Sandvik and Atlas Copco dominate the global market for underground tools, while Metso is one of the world’s largest suppliers of rock crushers and Outotec Oyj developed a flash smelting process used to extract metals from ore.

Exposed

This specialization has left them exposed to an industry whose prospects are increasingly grim. A three-year decline in mining capital spending is expected to continue, with a further drop by more than a third through 2017, according to analysis by Bloomberg Intelligence. 

“They face quite a struggle to even reproduce 2015 in terms of sales of services,” Bloomberg analyst Johnson Imode said. “It’s going to be a tough course.”

Shares in Nordic mining equipment suppliers have declined by 18 to 54 percent in the last 12 months, with the steepest decline posted by Outotec, which fell 19 percent in one day after it suspended its dividend and said service sales declined by 17 percent in the fourth quarter of 2015.

More worryingly for equipment suppliers, a recent survey by Citigroup found that 69 percent of respondents at mining companies said they intend to cancel service agreements, which could be a sign that they are planning to take over more mundane service jobs themselves. Some 62 percent of respondents said they intend to push back on prices for mining-services spending.

In-Sourcing

“One effect for some of these companies will come from continued production cuts in certain unprofitable mines; we’ve already seen a lot of that on iron ore in the U.S. and China, and it could spread,” said Citigroup analyst Klas Bergelind. “The second issue is in-sourcing. Simple services could be taken over by the miners themselves.”

Chief executives, including Thomas Schulz at Denmark’s FLSmidth, seem less concerned.

“We provide technical engineering competence, a lot of spare parts, and specialized items; that is relatively resilient,” Schulz said in a phone interview earlier this month. “Insourcing is not a risk for us.”

Anglo-Swiss miner Glencore has said it plans to lower spending on maintenance by $700 million this year in addition to cutting output and selling assets. The savings partly reflect increasing ease in obtaining “significant pricing reductions” from suppliers, Chief Financial Officer Steve Kalmin said on an investor call in December.

That’s not what Sandvik’s Rosengren, along with executives at Nordic companies Atlas, Metso, Outotec and FLSmidth & Co A/S would like to hear. The suppliers have all banked on services to keep growing and hold up margins at a time when new equipment sales are rare and machines are idled.

“The concerns we and investors have are more around pricing than volumes,” Andreas Willi, an analyst at JP Morgan, said by phone. “If they go to actual declines in prices that would be much more of a margin squeeze.”

Automation

Atlas Copco, which gets more than 40 percent of its revenue from services, still believes so-called aftermarket sales to the mining industry will grow this year, CEO Ronnie Leten said in an interview last month. This optimism comes even though the company reported a weakening of mining service demand in North America and Australia at the end of 2015.

“On the one hand, we read about mines closing - that is happening as we speak,” Leten said. “But on the other hand, we see a contradiction. The good mines are buying more services because they want to have more automation, they want to have higher productivity.”

Some analysts including at SEB aren’t convinced that will be enough to support Atlas’s services business. In a note published Jan. 29, SEB downgraded the shares to a hold rating from buy, citing concern about the aftermarket growth rate.

Tough Sell

Given that Atlas’ aftermarket business that also maintains the company’s compressors and vacuum systems is such a big part of Atlas, the fact that the growth rate is trending down is a concern, SEB analyst Daniel Schmidt and colleagues said in a note published Jan. 29. The aftermarket business makes up 75 percent of Atlas’ fair value.

“It’s not an easy place,” Atlas Copco CEO Leten said. “I have high appreciation for the guys today who have to face the purchase people on the mining side.”

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