Brexit Vote Could Delay Commodities Rebound, Warns Komatsu

  • CFO Fujitsuka says yen rally on Friday was an overreaction
  • Komatsu doesn’t plan immediate changes to U.K. Durham base

The U.K.’s vote to leave the European Union could delay a recovery in commodity prices, while the yen’s response to the Brexit decision, soaring to within sight of 99 to the dollar, was an overreaction, according to Komatsu Ltd.’s chief financial officer.

The Tokyo-based maker of construction equipment, the world’s largest after Caterpillar Inc. of the U.S., is particularly sensitive to commodity prices and the Japanese currency as more than three-quarters of its sales are made overseas, including the equipment used to dig up and transport metals, coal and other minerals.

Brexit and the retreat by investors from riskier assets due to uncertainty over growth “would pour cold water” on the emerging commodities rebound, Mikio Fujitsuka said in an interview at the company’s headquarters on Monday. The Bloomberg Commodity Index, which tracks 22 raw materials, entered a bull market in June after a near continuous slide since 2011.

“It’s hard to imagine that commodity prices will go up because of this,” Fujitsuka said. Meanwhile, the yen’s biggest rally against the dollar in almost two decades on Friday doesn’t presage a return to the levels seen in the aftermath of the Lehman shock. “I don’t think the currency is heading in the direction of 70 yen,” he said.

Shares Lower

The company’s shares pared losses to trade 1.2 percent lower at 1,695 yen as of 11:09 a.m. in Tokyo. The Nikkei-225 was down 0.4 percent. Komatsu has declined 15 percent this year.

While the Brexit vote won’t immediately affect Komatsu’s production in the U.K. -- the nation has yet to trigger a two-year negotiating period on its exit from the EU -- Fujitsuka said it would be possible to serve its European customers with diggers shipped from Thailand or Indonesia if the terms of trade become unfavorable. Komatsu employs about 400 workers in County Durham in the north of England. Its also has operations in Germany and Italy.

Komatsu has weathered a tough few years, as a slowdown in China, the world’s top consumer of raw materials, has driven down prices and cut investment in the mines that feed its growth. The company has estimated that industry demand for large-scale mining equipment has fallen to less than a third of the record levels seen in 2011.

Recovery Unclear

Komatsu said in April that profit will probably fall by a third in the financial year to March 2017 as demand flags for its products in China and other emerging economies, and as a stronger yen has made its exports less competitive.

Fujistuka said the timing of any recovery in mining is unclear and won’t come this year. As demand stalls, Komatsu is seeking to deepen its ties with the big cement producers that operate worldwide and use the same type of machines as the miners. Its strategy is the same: win global contracts for machines that promise to save fuel costs and improve productivity, the CFO said.

In China, while sales of diggers, mostly used in construction, keep sliding as growth weakens, Fujitsuka said the company has noted one bright spot: the average operating hours of its machines has increased for four straight months through May. Komatsu installs GPS devices on its equipment and the data is used to gauge demand.

The yen last traded at 102.01 to the dollar, rising from 106.17 before the U.K.’s referendum result. Some strategists and investors say the rally isn’t over, with HSBC Holdings Plc and GCI Asset Management Corp. mooting a rise to 95. Komatsu has budgeted for an exchange rate of 105 yen for the year through March.

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