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Komatsu bets on local concrete boom as global mining sales falter

by Masumi Suga

Bloomberg

Construction equipment maker Komatsu Ltd. expects spending on disaster reconstruction and prevention, as well as preparations for the 2020 Tokyo Olympic Games, to boost earnings in its home market.

The Abe administration approved a disaster-prevention bill last month as part of an election commitment by the Liberal Democratic Party.

While the bill doesn’t yet have a funding figure attached to it, the LDP has proposed spending ¥200 trillion over 10 years on prevention, such as strengthening buildings and seawalls, after the 2011 earthquake and tsunami left 18,526 people dead or missing in the Tohoku region.

“Machinery will be needed for post-quake reconstruction, strengthening infrastructure and the Tokyo Olympics,” Chief Executive Officer Tetsuji Ohashi said in an interview last week at Komatsu’s headquarters in Tokyo.

“Domestic demand will be stronger over the coming five-year span,” he said.

Komatsu, the world’s second-biggest maker of construction equipment, needs the boost to help offset a slump in sales to global mining companies. As part of its sales drive, the company is rolling out automated bulldozers that could be used to remove contaminated soil near the devastated Fukushima No. 1 nuclear plant, according to the Komatsu’s website.

The company, second only to U.S.-based Caterpillar Inc. in terms of sales, cut its full-year operating profit target by 31 percent to ¥210 billion on Oct. 28, citing slower demand from miners. In November, it was surpassed by Kubota Corp. as the most valuable machinery stock in Japan.

Komatsu shares fell 2.2 percent in the year to Dec. 30.

The world’s largest mining companies are reining in spending after a decade-long boom in metal prices slowed.

“Although the outlook is unclear until mining customers’ business year starts in January, we’ve heard things will be tough for resource majors,” Ohashi said.

Vale SA, the world’s biggest iron ore producer, last month slashed its investment budget for a third straight year to $14.8 billion, the lowest since 2010. Rio Tinto Group last month said it plans to cut capital spending to about $8 billion in 2015, less than half its outlay in 2012.

Global demand for mining equipment is forecast to fall by 50 percent in the year ending March 31, Komatsu said in an Oct. 28 presentation. It derived a third of its sales from miners in the last financial year.

Komatsu expects sales of its construction equipment in Japan to increase 6.9 percent from a year earlier to ¥313 billion in the current year, the presentation said. The company is set to derive 19 percent of its sales from Japan, which in 2011 once again became the company’s biggest market. Chinese sales are forecast to rebound 33 percent to ¥160 billion, or 10 percent of its revenue, after a two-year slide.

“The mood among customers in Japan is more optimistic,” Ohashi said. That’s an opportunity for Komatsu, he added.

Komatsu has begun selling in Japan what it calls the world’s first automated bulldozers, ahead of schedule, Ohashi said, without elaborating on the timing.

Increased spending on infrastructure will trigger a shortage of workers in the construction industry, and automated equipment will help ease this issue, he said.

The advantage of a bulldozer with automated functions is that it dramatically cuts training time.