Sandvik Sees Tough Mining Market for Next Two Years

Specialty steel and tool maker Sandvik said it is braced for tough market conditions in its mining and construction business in the coming years, and said more job cuts were likely.

The head of Sandvik's mining and construction division, which accounted for about 40% of group revenue last year, told Reuters on Monday in an interview the unit's outlook for 2009 and 2010 was bleak, but it had no plans to cut equipment selling prices.

"I believe ... we should prepare for at least two years of tough times," Lars Josefsson said.

"There will be differences between customer segments, but that (the downturn) would pass overnight is not something we are planning for."

Sandvik's Construction and Mining unit (SMC), which sells equipment such as rock drills, has benefited from a boom in the mining industry over recent years, but the slowdown in the global economy has had a severe impact on demand for metals.

The Swedish company has announced more than 1,000 job cuts in the division in recent weeks, mainly affecting employees on temporary contracts.

Josefsson said he expected further cuts, but that layoffs of fixed-contract staff were likely to be limited.

A number of small mining companies cancelled orders when the financial crisis hit in the third quarter. Lately, large mining customers have grown increasingly hesitant, Josefsson said.

"What has happened this last month is that even the big customers have said they are considering cancelling or postponing orders," he said.

Swedish rival Atlas Copco said last week it had seen a "clear slowdown" in mining investments so far in the fourth quarter, noting a double-digit percentage fall in orders for mining equipment as well as order cancellations.

Josefsson said the picture was similar for Sandvik, though the two companies' mining and construction businesses did not overlap in all areas.

"But with regard to base metals such as copper, nickel and zinc there is practically no difference between us," he said.

Sales of new equipment to base metal mines have been weakest while business with coal mines and gold mines remain relatively strong.

While sales of new equipment were expected to be down, Josefsson said aftermarket sales would most likely cushion the fall in the division's total sales next year.

Josefsson said the mineral exploration segment, which makes up roughly 5% of the division's revenues, had been hit hard by this year's sharp fall in metal prices, and demand for exploration equipment has fallen steeply in recent months.

"That market is not completely dead, but radically changed compared to the situation six months ago," he said.

In spite of the slowing market, Sandvik will not lower its prices on its mining and construction products to maintain sales volumes.

"Over recent years people have questioned why we didn't take out more in terms of prices when metal prices rallied - we held prices stable. It is important that we stay there even in tougher times," Josefsson said.

By Johannes Hellstrom, Reuters