On Wednesday, Toshiba International said it received a $60 million contract to provide a coal-fired steam generator to Kansas City Power & Light. The company said the 850 megawatt output will make this one of the largest plants of its kind in the U.S.
Caris & Co. analyst Gene Holmstead notes that this is the fifth order for Toshiba in the U.S. this year, with two-thirds of the total 3-gigawatt capacity of the five generators covered by coal.
Also Wednesday, Peabody Energy agreed to buy Australia's Excel Coal for $1.3 billion, suggesting it remains confident in the continued demand for coal.
The U.S. Energy Information Administration last year forecast that electricity produced by coal-fired generators in the U.S. will increase by about 40 percent, to 2.89 trillion kilowatt hours by the end of 2025.
"With crude oil prices above $70 a barrel, U.S. power utilities have been shifting to alternatives such as coal and natural gas," Holmstead said. "Mining companies will continue investments in new equipment since commodity prices remain at levels far above where upgrades make economic sense."
He says accelerating global demand for energy has stimulated a wave of exploration and extraction investment that should continue for several years.
All of this would suggest that the outlook for manufacturers of mining machinery is about as good as it can get.
Not so fast.
UBS Securities analyst David Bleustein recently came out with an extensive report on the mining machinery sector, saying that while the prices of key mined materials, including coal, remain well above the marginal cost of production, other issues, such as supply-chain constraints and the growth of "in-situ" mining techniques, may hamper growth rates in the mining machinery sector.
Bleustein noted that several machinery companies in the recent past have cited supply chain issues as limiting shipments. In discussing its first-quarter results, for instance, Caterpillar noted that the supply of tires for mining trucks and large machines remained constrained and that the company continued to struggle with getting enough tires for its production. Likewise, Joy Global said in its second-quarter report that its supply chain continued to be pressured, and the company had experienced quality and other start up problems with some new suppliers.
"Although we believe these same constraints could effectively extend the length of the machinery upcycle, we believe the inability to add capacity across the entire supply chain will limit growth in mining machinery shipments in 2007,” Bleustein said.
Meanwhile, the upswing in "in-situ" mining, which does not require trucks and shovels but instead relies on steam injection to remove bitumen from the ground, may start eating into the growth of the more traditional machinery companies.
According to Bleustein's industry contacts, and Canadian oil sands studies, because many deposits are buried too far below the surface to be extracted by traditional mining methods, about 80% of oil sands deposits in Alberta, Canada, are more economically recoverable through in-situ extraction methods.
While he expects the Oil Sands area to remain in growth mode for the next several years, Bleustein also expects in-situ technology to erase some of the mining machinery manufacturers' growth potential from the region.
He said the acceleration of in-situ projects leaves companies in the oilfield services and energy equipment industry well positioned. In particular, he said Precision Drilling Trust should be one of the biggest beneficiaries. Bleustein said Precision Drilling’s specialized rig technology provides it with a competitive advantage in drilling the dual bore horizontal wells at relatively shallow depths that are required for in-situ projects.
For the more traditional names in mining equipment, such as Caterpillar, a deceleration in mining-related capital spending could have a noticeable impact, as the company derived 12 percent of its revenue from mining-related spending.
"Although we continue to expect growth in Caterpillar's mining machinery business in 2007, we believe that growth will be driven by working down CAT's order backlog," Bleustein said.
(To comment on this article, email Tom Granahan.)