Komatsu Braces for a Double Whammy: Tariff Escalation and Middle East Disruption

Profit guidance falls again as the construction machinery giant struggles to pass through U.S. tariff costs and absorb a regional demand shock.

6301.T · Earnings Call · 2026-05-05

Record Sales, Falling Profit

Komatsu Ltd. reported its fifth consecutive year of record net sales for fiscal 2025 (ending March 2026), but the glow fades quickly. While net sales inched up 0.7% to ¥4,132.8 billion, operating income fell 13.7% to ¥567.3 billion, and the operating margin contracted 2.3 points to 13.7%. The company's own guidance for fiscal 2026 implies another 10.5% drop in operating income to ¥508 billion, a steeper decline than the market had hoped. The culprits are familiar: tariff refund benefit is being overshadowed by U.S. tariff costs that are set to balloon, while the Middle East conflict adds an entirely new layer of demand and cost uncertainty.

Tariffs: The Bill Keeps Growing

In fiscal 2025, the tariff impact on the Construction, Mining & Utility Equipment segment reached ¥64.2 billion. But as CFO Hiroshi Hosotani explained, that was only the beginning. “The impact of tariffs in fiscal '25 amounted to JPY 64.2 billion.” — Hiroshi Hosotani, Chief Financial Officer (CFO) · 2026-05-05 The good news is that some relief is in sight: the company has factored in ¥30 billion in refunds for fiscal 2026, reducing the net cost increase to ¥37.8 billion. Yet even with that refund, the total tariff expense is set to roughly double. The explanation for the jump lies in the mechanics of the tariffs themselves. As General Manager Kiyoshi Hishinuma detailed in the Q&A, the prior practice of calculating steel and aluminum content to lower the effective tariff rate is no longer viable. “We have factored in additional costs of JPY 67.8 billion. However, we have also factored in JPY 30 billion in refunds, resulting in a net cost increase of JPY 37.8 billion.” — Kiyoshi Hishinuma, General Manager, Business Coordination Department · 2026-05-05 The company cannot simply pass the costs on to customers. Hishinuma admitted that “Caterpillar is not raising prices, and those are the circumstances. So there may be a risk. However, for the tariff increases in the U.S., we won't be able to absorb it completely just with the U.S. So global price increases need to happen.” — Kiyoshi Hishinuma, General Manager, Business Coordination Department · 2026-05-05 This echoes the challenge from the prior year, when the company had already struggled to push through price hikes in a competitive market.

Caterpillar is not raising prices, and those are the circumstances. So there may be a risk. However, for the tariff increases in the U.S., we won't be able to absorb it completely just with the U.S. So global price increases need to happen.
Kiyoshi Hishinuma, General Manager, Business Coordination Department · 2026-05-05

Middle East: A New Shock to the System

The escalation in the Middle East is a fresh headwind. The company has assumed the turmoil will persist through the year, factoring in a ¥90.1 billion decline in sales and ¥18.8 billion in higher costs. Executive Takuya Imayoshi explained the rationale: "Last year, U.S. tariffs just started. So it was hard to account for it in our guidance. But based off IMF predictions and so forth, we have viewed how much GDP is likely to decline and what's going to happen to demand." The impact is being felt across Asia and the Middle East, with a 60% demand decline expected in the Middle East region alone. This is not a one-off adjustment. The company is prepared for higher crude-oil-derived material costs, but the risk of supply disruptions remains unquantified. "However, regarding the impact on production due to shortages of crude-oil-derived materials, while there is a risk, the situation is unclear at this time. Therefore, it has not been factored into the fiscal 2026 outlook," Hishinuma said.

Mining: The Replacement Cycle Turns

Another key drag is the mining equipment segment. While copper and gold demand remains robust, replacement cycle is turning against the company, especially in North America and Oceania. Sales of mining equipment are forecast to decline 2.4% in fiscal 2026. In Indonesia, the company's most profitable market, coal demand is weakening as the government pushes to reduce production and introduce biodiesel mandates. Hishinuma acknowledged the challenge: "The cycle we're referring to is not about the 2011 cycle. It's more about whether we have big deals or not in recent years." The company has already revised its AHS target upward to 1,200 units, but that won't offset the cyclical weakness.

Shareholder Returns Remain a Priority

Despite the profit decline, Komatsu is maintaining its dividend at ¥190 per share and has authorized another ¥100 billion buyback for fiscal 2026. This brings the total payout ratio to 85.4% on a forecast basis. New CFO Hosotani, who took over from Horikoshi, framed it as a commitment to capital discipline: “But basically, we always have to be mindful of the shareholders in running the business. And I would like to be contributing to the way we run the business.” — Hiroshi Hosotani, Chief Financial Officer (CFO) · 2026-05-05 The company's own trajectory shows how persistent these themes are. In the prior call from July 2025, Horikoshi was already discussing the finer points of tariff content calculations: “For steel and aluminum tariff rates that is going to be imposed, we scrutinized the mix and its contribution. Also, we looked at our work-in-progress inventory at our factories to see what kind of impact they have.” — Takeshi Horikoshi, Chief Financial Officer · 2025-07-29 And Hishinuma had already flagged the difficulty of passing through prices: “Basically, starting from what we can do. Basically, while we have been shipping to Canada and Latin America from North America, we are starting to conduct direct delivery.” — Kiyoshi Hishinuma, General Manager of Business Coordination Department · 2025-07-29 The message is clear: the incremental tariff burden is now structural, the Middle East conflict is a new unquantified risk, and the mining cycle is turning. Komatsu is trying to squeeze out cost savings and pass through price increases, but the market is already discounting a second straight year of profit erosion. The buyback and dividend provide some floor, but they can't mask the underlying operational pressure.