“Through most of 2012, the outlook for our company was focused on the number and timing of mine expansion projects that could provide upside opportunity to our order run rate,” continued Sutherlin. “This quarter’s decline in aftermarket orders expands the focus.
We evaluate our aftermarket on a sequential basis as well as year over year because of the quick turn of orders into shipments. The sequential decline in aftermarket orders from the fourth quarter was concentrated in three regions, and was a mixture of anticipated softness and timing issues. We had expected near term softness in aftermarket orders in Australia, as customers there cope with margin pressure from lower commodity prices and increasing costs. Although the cost increases were largely from non-operating factors, such as capital expenditure overruns, increased taxes and adverse exchange rates, miners deployed broader efforts to reduce costs. This has primarily resulted in reduction of general contractor activities, but also slowed decisions on normal parts and services that we provide. The resulting order reductions are not sustainable, and we expect aftermarket order rates in Australia to return to normal.
We also had sequential aftermarket order rate declines in markets that have strong outlooks, but these are due to timing. South America is a region with our strongest outlook, and yet timing issues significantly reduced this quarter’s aftermarket orders. Aftermarket order rates for Africa were slowed by labor unrest despite a number of projects in progress to increase production of both coal and iron ore. These three regions—Australia, South America and Africa—accounted for most of this quarter’s sequential decline in aftermarket orders, and we believe these markets will recover. These examples indicate that our aftermarket orders may continue to experience variability until demand reduces the supply surplus that currently exists in a number of commodities.
While some regions have underperformed, we are seeing encouraging signs from the U.S. coal market. After four quarters of sequential decline, both original equipment and aftermarket orders stabilized over our first quarter. U.S. aftermarket orders have declined more than end-use consumption as our customers reduced the parts inventories they hold at mine site and stretched the time between rebuilds. Parts orders should continue to return to end-use consumption levels, and delayed rebuilds require increased work and therefore their impact is mostly timing.