Cloudy Outlook For Joy Global

BMI View: In yet another sign of how the weakness in the global coal sector is taking its toll on the heavy industry, mining equipment maker Joy Global reported a 36% slump in third-quarter orders and warned of sharply lower revenue for the next fiscal year . The pain in the coal market that many mining servicing firms have experienced of late is certainly not over. The onslaught of the shale gas boom, coupled with the steady growth of wind and solar energy, suggests to us that coal's traditional dominance in the US' electric power sector has passed its golden age.

Hit by a wave of spending cutbacks in its home market, Joy Global (Joy) posted a 36% slump in third-quarter orders and warned of sharply lower revenue for the next fiscal year. Profit for Q313 was down 5.3% year-on-year to reach US$183mn, while revenue slid 5.1 % y-o-y to US$1.32bn. Although revenue forecast for FY2013 was maintained at US$4.9-5.0bn, Joy expects revenue for FY2014 to fall below US$4.0bn on the back of a supply glut and low prices in the coal industry.

Q313 Highlights

  • Bookings totalled $695mn, down 36% y-o-y, and down 28% y-o-y excluding foreign currency impacts.

  • Net sales were $1.3bn compared to $1.4bn a year ago.

  • Operating income was 20.8% of sales compared with 21.6% of sales in Q312.

  • Earnings per fully diluted share were $1.71 in the current quarter, compared to $1.82 in 2012. Excluding unusual items, earnings per fully diluted share was $1.70 in the current quarter, compared to $1.87 in 2012.

  • Cash provided by continuing operations was $350mn in Q313 compared to $157mn a year ago.

  • The Board of Directors authorized Joy to repurchase up to $1.0bn in shares of common stock over the next 36 months. Under the program, the company may repurchase shares in the open market in accordance with applicable rules and regulations of the Securities and Exchange Commission.

Hit By US Coal Glut
Joy Global - Net Sales By Segment (LHS, US$mn) & Geography (RHS, US$mn)

Joy will step up on cost-cutting measures to better brace itself from further weakness in the coal industry, an outlook largely similar to our own. We expect a growing number of US coal miners to come under duress due to a combination of depressed demand, weak prices and increasing environmental hurdles . Following a lacklustre 2012, thermal coal consumption in the US is starting to claw back some of its lost ground as a result of rising natural gas prices. According to the Energy Information Administration (EIA), the share of coal in the country's electricity mix has rebounded from 37% in 2012 to 40% so far this year.

Coal Competitiveness Past The Nadir
Price Ratio: Central Appalachian (NYMEX) Coal / Natural Gas (Henry Hub)

While rising natural gas prices ( see 'Natural Gas Price Forecast: Tighter Supply To Send Henry H ub Higher Post 2015', August 16 ) will temporarily encourage higher coal burn rates, we caution that this will be insufficient to stem the overall decline in the US coal industry. The onslaught of the shale gas boom, coupled with the steady growth of wind and solar energy, suggests to us that coal's traditional dominance in the US' electric power sector has passed its golden age .

Coal's Golden Age Is Over
United States - Primary Energy Consumption by Source (Quadrillion Btu)

The outlook for the coking coal industry is equally bleak . Used as a key ingredient in the production of crude steel from blast furnaces, the global coking coal sector will face headwinds over the coming quarters as the steel industry remains encumbered by weak fundamentals ( see 'Coking Coal: Feeling The Steel Pinch', August 14). Crucially, any recovery in steel demand will fail to drain the excess supply in the coking coal market and we expect prices to remain subdued over the coming quarters. W e are aware that a large number of US coking coal producers are struggling to operate profitably at the current price level of US$145/tonne . Our view that the US economy is on the cusp of a multi-year period of stronger growth does not spell significantly better times for local coking coal producers. Output prices will remain low, domestic steel production stay subdued and a stronger US dollar will temper the recent surge in US coal exports.

Limited Respite In Sight
Hard Coking Coal Benchmark Contract Price (US$/tonne)

Although an increasing number of US coal producers are pegging their hopes on exports to the East, the construction of new export terminals in the Pacific Northwest are hanging in the balance due to mounting opposition from environmental groups ( see 'Asia Export Trend Looking Increasingly Tenuous', August 15). To be sure, plans for three of the six proposed coal export terminals in the Pacific Northwest have been suspended, while the remaining three are mired in controversy and legal disputes which could take years to resolve. We believe that bullish industry excitement towards future US exports to Asia are overdone and the route will not be the sure growth engine that many US coal producers are betting on .

Pacific Northwest - Proposed Expansion Projects
Source: BMI, Various news sources
Port State Project Status Capacity (million metric tonnes)
Cherry Point Washington Delayed 49
Coos Bay Oregon Suspended 9.9
Grays Harbor Washington Suspended na
Longview Washington Proceeding 43.5
Morrow Oregon Proceeding 7.9
St. Helens Oregon Suspended 8

Aside from the US, two of Joy's biggest markets, Australia and China, are facing their fair share of problems as well. Within Australia, fortunes are fast fading for many coal miners as the rapid escalation in operating costs over the past years place severe pressure on mining operations. Major miners including Glencore Xstrata , Yanzhou Coal and Peabody Energy have scaled back their production and announced a series of job cuts in recent quarters. Indeed, the rush to invest billions of dollars in new mines when thermal coal prices were trading at a record high of US$190/tonne in 2008 has in turn, come back to haunt miners. Supply from new mines is weighing heavily on the market at a time when a pool of secondary suppliers are joining the coal wagon ( see 'Coal: Shifting Players, But Continued Growth Ahead', July 26 ).

Ample Supply To Cap Price Gains
Select Indicators - Coal Mining Production (% chg y-o-y) & Thermal Coal Prices

In China, the bulk of the thermal coal industry is struggling to operate profitably with a cash cost of US$80-100/tonne. It was reported that around 90% of mainland-listed coal firms recorded a profit drop in 2012 , with total profits currently languishing at a five-year low ( see 'China Slowdown: Miners On Shaky Ground', August 29 ).

Fortunes Fading, Coal Woes Continue
Joy Global - Share Price (USD)
Despite the gloomy outlook in Joy's main markets, webelieve the growing prominence of Africa in the global mining arena will provide some cushion to the downside for the company .A swathe of foreignminershave continued to make their presence felt in countries such as South Africa, Ghana and Mozambique over the past years in an attemptto secure supply security and counter the problems of escalating cash costs, growing economic nationalism and depleting reserves in their home markets. Encouragingly, investment into Africa from Chinese and Indian state-owned miners hasbeenespecially forthcomingand we believe this will cast a much-needed lifeline to Joyover the coming quarters.
This article is tagged to:
Sector: Mining
Geography: Australia, China, United States, Global

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