There’s not much Joy Global Inc. (NYSE:JOY) investors can look forward to, for at least another year. That’s what the company’s latest earnings release had to say. Plummeting orders, depleting backlog, dour guidance — Joy’s report had everything to scare an investor away.
But the market seems to have missed something. Joy Global Inc. (NYSE:JOY)’s order book is actually showing signs of fatigue that were last seen during the crisis of 2009. I am not saying so — the company is. Now, if that doesn’t sound like a warning bell, what does?
Where Joy is losing ground
The fact that Joy Global Inc. (NYSE:JOY) gets more than 60%
of its sales from coal-mining customers seals its fate for another year or so. Coal producers like Arch Coal Inc (NYSE:ACI) and Peabody Energy Corporation (NYSE:BTU) may have reignited hopes with their recent surprise profits, but that doesn’t help Joy Global Inc. (NYSE:JOY)’s case. Both companies have ardently cut costs in recent quarters to maintain margins, which is hardly the piece of news that a mining-equipment maker like Joy would want to hear.
Arch Coal Inc (NYSE:ACI) has already reduced its capital expenditures by a whopping 45% since 2011, and is planning further reductions for 2014. Peabody Energy Corporation (NYSE:BTU) is cutting its capital expenditures by 50% this year while deferring projects in the longer run.
2009 is back to haunt
As coal producers tighten their purses, demand for Joy Global Inc. (NYSE:JOY)’s equipment could only fall further. New orders in Joy’s third quarter plunged 36% year over year. Worse yet, bookings plummeted 38% sequentially, indicating that the situation in Joy’s end markets is only worsening.
Now here’s the scary bit: Joy Global Inc. (NYSE:JOY) didn’t book any orders for its shovels or longwall mining equipment in the last quarter. The last time that happened was in 2009. Though Joy called it “an unusual situation” and expects orders to pick up soon, the fact that the mining malaise has deepened enough to bring back frantic memories of the 2009 crisis suggests that the recovery could be painfully slow.
Subsequently, Joy Global Inc. (NYSE:JOY) expects to end its financial year 2013 with roughly 13% lower revenue. The outlook is even bleaker for 2014: Falling orders may restrict Joy’s annual revenue to around $4 billion, which would be a 20% fall from Joy’s projected 2013 revenue.
It’s not a one-day story
The real concern is that the headwinds may not be restricted to a year or two. Even as coal prices hit multiyear lows, Australian miners have ramped up production in recent months in the wake of a lower Australian dollar. For instance, Peabody Energy Corporation (NYSE:BTU), which derives more than 40%
of its revenue from Australia, reported a 5% increase in last quarter’ coal volumes from its Australian operations even as prices dropped 5% year over year.
Australia has thus put further downward pressure on coal prices while adding to the supply glut. Meanwhile, the nation’s primary trading partner, China, continues to import greater amounts of coal even as its high-cost domestic stockpiles remain high. In 2012, despite the Chinese economy slowing down, the country’s coal output increased 4%.
The climax could stink
China will have to wind down its existing inventory to see new production go online. Meanwhile, its coal industry is likely to enter a consolidation phase, which could see thousands of smaller mines go out of business. Furthermore, China has an ambitious target to reduce coal consumption by nearly 45% by 2020 amid environmental concerns.