Komatsu cites China slump for lower Asia demand

436 Komatsu, the world’s second biggest maker of building and mining equipment, says its Chinese sales are falling more steeply than anticipated as national economic growth continues to lose momentum.

The Japanese construction equipment manufacturing giant’s sales in China dropped dramatically in April and May 2014, with delays to the start of a number of major construction projects likely to see the firm missing its annual national target, Chief Executive Officer Tetsuji Ohashi said in an interview published by Bloomberg Businessweek. However, Ohashi said the bottom for mining machinery demand could be nearing.

As a seller of equipment to both mining and construction companies, Komatsu is said to be particularly vulnerable to fading growth in China, the world’s second-biggest economy and its biggest buyer of raw materials. “Since the impact of China is big, we will closely monitor the situation,” Ohashi, 60, said during the interview at the company’s Tokyo headquarters last week.

While China’s slowdown risks putting downward pressure on commodity prices and the brakes on miners’ spending, Ohashi said the mining equipment market could be “very close” to bottoming out. Even if there’s no recovery or flattening in demand in the fiscal year to March 2015, he expects to see more mining companies seeking quotations for products as “they cannot miss investment timing for their growth.”

Komatsu’s China sales in April and May 2014 were down about 20% on the previous year, Ohashi said. The nation accounted for 9% of Komatsu’s total last year and the company had hoped to grow that to 10% this year.

The rest of Asia-Pacific, not counting Komatsu’s Japanese home market, made up 20%, including sales to the mining nations of Australia and Indonesia that are feeding China’s economy. Peoria, Illinois-based 395 Caterpillar last month reported a 30% fall in Asia-Pacific sales for the three months to May 2014.

5060 Rio Tinto Group (RIO), one of Komatsu’s biggest customers and a mainstay supplier to China, is said by Bloomberg Businessweek to be one of the mining groups paring spending to contend with previous over-investment. The London, UK-based company, which has almost half its assets in Australia, has been on a drive to strip out more than $2.3 billion in costs since the start of last year, while expansions, like the underground stage of the massive Oyu Tolgoi copper and gold mine in Mongolia, have been put on hold.

Regardless of short-term fluctuations in demand, Ohashi said miners will need more equipment to dig up the mineral resources that will support global growth in population and urbanisation, and the need for more roads, schools, hospitals and other infrastructure in emerging economies.

Komatsu forecast in April 2014 that global demand for mining equipment in the financial year to March 2015 would hit a 2002 trough of about 2,000 units, down 38% from a year ago, as miners continue to cut spending. The market’s 2011 peak saw around 7,000 units sold.

Ohashi said mining sales are unlikely to contract further from that conservative estimate. Komatsu makes proportionately more profit on its mining dump trucks and excavators, as the field of suppliers is less crowded than in construction.

In China, Ohashi said he expects some improvement in demand from the second half of 2014 due to government stimulus spending. The company forecast in April 2014 that demand would be flat to 5% lower in the financial year to March 2015.