Kennametal CEO sees lower tungsten price

NEW YORK (Reuters) - Prices of tungsten, a raw material used in the production of cutting tools, may be poised to retreat as more supply comes to market, Kennametal Inc.'s (KMT.N: Quote, Profile, Research, Stock Buzz) chief executive said on Monday.

Lower prices for Kennametal's main raw material could boost results in coming years, while growth will also come from its international operations and its higher-margin advanced materials group, CEO Carlos Cardoso said.

"We are very hopeful that our raw material prices will level off" by 2008, Cardoso said, speaking at the Reuters Manufacturing Summit in New York.

Cardoso said it was hard to tell whether Kennametal would see lower costs this year, as it takes time for new tungsten mines to become operational.

"We feel there is a good possibility that as (tungsten supply in) the western world comes online we will see a decrease in our main raw materials (costs)," he told the summit.

Tungsten, also used in light bulbs, the balls in ball-point pens and to strengthen steel, has almost tripled in price in the past two years on rising world demand and a shortage in China, the world's biggest producer.

Asked if lower tungsten prices would affect Kennametal's earnings, Cardoso said, "Absolutely, yes, in a very positive way." But he added that with so many "moving parts," tungsten by itself would not cause him to revisit the company's earnings forecast, which calls for 2007 adjusted earnings per share of $4.40 to $4.50.

Cardoso, who does not disclose Kennametal's total tungsten bill, said tungsten mines are profitable when the price of the metal reaches $180 per metric ton unit. A metric ton unit is one-hundredth of a metric ton. Prices recently hit $300 per metric ton unit, he said, but it takes several years for new mines to come online.

Cardoso said if raw materials prices retreat, Kennametal has no plans to roll back recent price increases, since those hikes were the first in years and also reflected product improvements.

Separately, Cardoso said he expected to continue a string of small acquisitions to help expand Kennametal's geographic reach and grow its advanced materials segment, whose profit margins are about 3 percentage points higher than those in its bigger metal-working segment.

Kennametal has said the advanced materials business, which provides tooling systems and engineering services for industries like energy and mining, should equal its metal-working division in size within 3 to 5 years, as customers look for ways to cut production costs. It currently accounts for about a third of total Kennametal sales.

The company gets little credit for its acquisitions, which number about one per quarter, because it pays a good price for businesses and quickly integrates them, Cardoso said. Kennametal's main criteria in evaluating a purchase are whether it's a good fit, has a unique technology and whether it will contribute to earnings within 12 months.

Cardoso said he felt good about the health of the U.S. economy, despite a downturn in some U.S. sectors like autos.

"Our order intake is still very strong," he said.