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FLSmidth releases Q2 2014 results

World Coal,

The report notes that prospects for the global economy suggest that a firmer upturn is underway, albeit with significant regional differences. Developing countries have by and large recovered from the financial crisis and most of the acceleration in global growth is expected to come from High-income countries. Short term, the improvement in many high-income countries alone will be insufficient to generate a substantial increase in business activity

Mining capex deteriorated into 2014 and is expected to continue to do so throughout the year, the report notes. Although recovery is not immediately around the corner, current market conditions give no reasons to fear an extended downturn reaching beyond that of an ordinary mining capex downturn. Firstly, most mines run at or close to full capacity, causing significant wear and tear. At a certain point, investments are necessary to avoid disproportional operational costs. Secondly, a prerequisite for mining investments to rebound is miners´ ability to generate sufficient cash flow to cover planned dividends, and most miners are well on track with their cash flow programmes.

Thermal coal prices continued the downward trend in Q2. Broadly, analysts expect demand growth to slow in the coming years and the market to stay subdued until the current strong supply moderates. Pricing dynamics are increasingly evolving around China and India, the sources of more than one-third of global coal import. Metallurgical coal prices, on the other hand, have shown clear signs of stability.

Material handling sector

The market for material handling has been impacted by the mining investment downturn and further, the commodities typically associated with this business face the weakest prices and outlook. Still, the overall market is substantial – encompassing industries, such as cement, energy and construction.

Order intake for this division of FLSmidth has been ‘sub-scale’ for some time, as focus has been on finalising a number of legacy projects. As such, material handling has a potential to increase volume despite challenging end markets, the company’s report notes.

Order intake in Q2 decreased 19% compared to the same period last year, primarily due to the absence of large orders in Q2.

Despite the decrease in orders, the company announced a significant increase in EBITA compared to a year previously. EBITA amounted to DKK 39 million.

Mineral processing

During Q2 2014, the mineral processing division of FLSmidth saw its focus land squarely on consolidation. This included the reduction of more than 300 positions across the division.

Despite mining capex being close to market bottom, FLSmidth saw some reason for optimism. The company said that some large projects could become effective this year, keeping overall order activity on a par with last year, despite the lower run-rate for unannounced order in 2014.

However, the company also noted that there was a risk that a number of projects run by junior- and mid-sized mining companies may not actually reach the purchase order stage due to a lack of financing.

The company was keen to pick up on the positives in an otherwise challenging market, noting that, after a five-quarter drought in announced orders in mineral processing, the division secured the only announced order for the group in Q2 – from Mongolian MAK. The company described the order as “a bright spot in an otherwise sluggish market”.

Order intake in Q2 2014 decreased 21% compared to Q2 2013, as revenue for the division decreased 45% to DKK 1355 million. Meanwhile EBITA decreased 77% to DKK 59 million.

Growth on the cards

Despite the current blip, the demand for materials and minerals will continue to grow, according to FLSmidth. This growth will reflect growing global wealth, a growing global population, and societal changes in the developing countries where the growing middle class is boosting demand for infrastructure and consumer goods. Thus, the longer-term outlook remains encouraging for both the materials and minerals industries.

Adapted from press release by Sam Dodson

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