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Industry Outlook

A world economic recovery, as witnessed from equity market improvements of the lows experienced since the 2008 global crisis, has been quite impressive. The journey was difficult with ever-present headwinds hindering growth, the most recent of which was the Eurozone debt crisis that significantly slowed down the overall growth pace in 2011 and 2012.

According to the World Economic Outlook Update published by the International Monetary Fund (IMF) in January 2013, the world economy is projected to grow 3.5% in 2013 (versus 3.6% projected in October 2012) and 4.1% in 2014. Growth in advanced economies and emerging and developing countries are projected at 1.4% (versus 1.5% expected earlier) and 5.5% (versus 5.6% expected earlier) in 2013, respectively. In 2014, advanced economies are projected to grow 2.2% and emerging markets 5.9%.

No doubt obstacles still persist as can be deduced from an unstable European economy and slowly reviving advanced countries that in turn are affecting emerging markets and developing economies; the overall growth picture may not materially deteriorate from the IMF’s January 2013 forecast.

Demand for the Machinery industry is correlated to increasing economic activity, which stimulates demand for industrial products, thereby increasing the need for new/advanced machinery. The major end-markets for the machinery industry include agriculture, construction, mining and energy industries, among others.

Machinery Industry Prospects in the United States

The IMF expects the United States to grow 2.0% in 2013 as against 2.1% expected earlier as growth has slowed in the country with evidences of weak consumptions and employment levels. Growth in 2014 is projected at 3.0%.

The Machinery industry is one of the most attractive industries in the U.S. Growth prospects for this industry can be deduced from the indicators to the performances in the recent past. In the fourth quarter of 2012, industrial production in the United States rose by an annual rate of 1.0% while manufacturing output increased by 0.2%.

According to the US Census Bureau report published in January 2013, machinery shipments in 2012 through November increased 9.6% year over year while new machinery orders witnessed a 3.1% decline in the same period. Machinery order backlogs at the end of the quarter also plummeted 7.8%.

Shipments for construction and industrial machinery rose by 37.6% and 13.0%, respectively. Shipments for mining equipment were up 6.0% while farm machinery shipments decreased by 13.8%.

International demand for technologically advanced construction and agriculture equipment is improving. The U.S.-Russia trade bill will boost the U.S.’s export of construction equipment to Russia -- the 11th largest export market for U.S. construction equipment. According to an earlier report published by the Association of Equipment Manufacturers (AEM), the United States’ construction equipment exports rose 24% while agricultural equipment exports registered a 29% increase in the first half of 2012.

Japanese Markets

According to the latest report published by Japan’s Cabinet Office, on a monthly basis, core machinery order in November 2012 grew 3.9%, up from a 2.6% increase recorded in October and 4.3% fall in September. Recovery in capital spending and higher orders from the chemical industry was the main drivers of the growth.

Also, overseas demand for machinery grew a whopping 17.0% in November, indicating prospects of solid demand growth in the months ahead.

According to the IMF, the Japanese economy is projected to grow 1.2% in 2013 and 0.7% in 2014.

Emerging Nations

China and India, the two major emerging/developing nations, are expected to show signs of tangible growth in the years ahead. However, near-term conditions in these economies are weak. According to the IMF, the Chinese economy is projected to grow 8.2% in 2013 as against 8.5% expected earlier in 2013 and 8.5% in 2014.

Looser fiscal and monetary measures by the Chinese authorities -- efforts of increasing fixed asset investment along the lines of interest rate cut by the Chinese central bank -- are expected to offset some of the recent weaknesses in economic data. Foreign Direct Investments (FDI) flow into the country has slowed and exports have weakened, especially due to a slowing global economy while a lack of domestic demand for construction, mining and textile machinery contracted imports.

Industrial production in India has been weak in recent months with the released data showing a 0.1% annual decline in November 2012. Poor performances by manufacturing, mining and capital goods sectors clearly reflect that weak domestic demand and exports were hurt largely by the European debt crisis. According to IMF, the country is projected to grow 5.9% in 2013 as against 6.0% expected earlier and 6.4% in 2014.

Korea’s industrial production recorded a monthly gain of 2.3% in November, according to the latest data released by Statistics Korea. The country seems to be recovering from the impacts of weak exports due to global uncertainties, especially the Eurozone crisis.

Thailand seems to be recovering fast from the ravages of its floods; reconstruction activities are perceptible in the region to spur demand in the machinery industry. According to the data released by the Office of Industrial Economics of Thailand, industrial production in November 2012 spurred 83.3% year over year. This upsurge, despite weak economic conditions around the world, is likely to impact the overall growth in the country.

Other Major Players

Upcoming sporting events to be held in Brazil, rising government spending to improve the country’s infrastructure, growing trade relations with other economies, as well as huge foreign direct investments -- all these bode well for the economy. According to the IMF, Brazil is expected to grow 3.5% in 2013 (versus 4.0% expected earlier) and 4.0% in 2014.

South Africa is also making progress and is expected to grow 2.8% (versus 3.0% expected earlier) in 2013 and 4.1% in 2014, as projected by the IMF. The government is focused on improving its mining, manufacturing and agricultural sectors. Moreover, huge public investments in the infrastructure development programs remain in the forefront.

Eurozone - A Hurdle

The Eurozone debt crisis has slowed down the overall growth pace in the region as well as of the global economy. According to a report published by Eurostat in January 2013, industrial production (excluding construction), on a monthly basis, in the Eurozone fell by 0.3% in November.

On a year-over-year basis, industrial production in November dropped 3.7%, including a 7.6% fall in Italy, 7.2% in Spain and 6.6% in Ireland.

Construction output, on a monthly basis, fell 0.4% in November 2012. On an annual basis, production dropped 4.7% in November, including a 20.4% decline in Slovenia, 17.9% in Portugal and Italy, and 13.1% in Slovakia.

According to the VDMA machine makers’ association, German machine tool orders in November 2012 plummeted 3.0% year over year, with domestic orders down by 2% and international orders sliding by 4.0%.

Important Players of the Machinery Industry

Deere & Company’s (DE - Analyst Report) fiscal fourth quarter and year 2012 (ended October 31, 2012) results were impressive. For the year and the quarter, equipment sales rose roughly 14%, with price realization contributing 4%. The agricultural and forestry equipment provider is expanding globally to leverage benefits from the growing global farm industry.

For fiscal year 2013 equipment sales are expected to grow 5% year over year and for the first quarter by 10%. Net earnings for 2013 are projected to be approximately $3.2 billion.

Caterpillar Inc. (CAT - Analyst Report) posted a 5% increase in equipment sales in the third quarter of 2012. For the year 2013, the company expects modest improvements in U.S. and China along with other major developing countries while conditions in Europe are expected to be difficult. Revenue growth in 2013 is expected to be within the (5%) to 5% range.

Italy-based CNH Global NV (CNH) posted a 5% to 11% year-over-year increase on a constant currency basis in its equipment sales (agricultural and construction) in the third quarter of 2012.

Other top players in the agricultural, construction and mining industry includes: AGCO Corporation (AGCO - Analyst Report), The Toro Company (TTC - Snapshot Report), Terex Corp. (TEX - Analyst Report) and Kubota Corporation (KUB), among others.

Prime companies operating in machinery industries other than agricultural, construction and mining, include Rockwell Automation Inc. (ROK - Analyst Report), Illinois Tool Works, Inc. (ITW - Analyst Report), Manitowoc Company, Inc. (MTW - Analyst Report), among others.

OPPORTUNITIES

Fiscal government expenditures play a counter-cyclical role curbing the ill effects of slower economic developments and a tight credit market. China’s structural stimulus package, government spending on social welfare, construction of low-cost housing, completion of infrastructure projects on agriculture, forestry and water resources received special attention.

Also, the U.S. Congress had a stimulus package designed in 2009 that had money flowing into infrastructure spending. Also, The American Energy & Infrastructure Jobs Act (H.R. 7) will boost spending in the infrastructure projects. Approximately $260 billion will be allocated to fund roads, bridges and highway projects over five years.

Russia, which became a World Trade Organization (WTO) member in 2012, will open the gates for companies worldwide to benefit from the growing needs for modernizing the agricultural, transport and infrastructure sectors of the economy.

WEAKNESSES

We remain wary of the rising raw material costs of some of the major players of the machinery industry. Steel prices along with energy, especially coal and fuel prices, remain the prime causes of concern.

Research and development costs are on the rise for machine makers in their pursuit of manufacturing more sophisticated and technologically advanced machinery. Availability of funds remains difficult as some major nations are still struggling to bring stability to their own economies.

Favorable commodity prices are a boon, although government policies affecting prices along with export and import policies and trade relations with other countries impact the machinery industry.

Conclusion: Prospects Bright

Despite the prevailing global uncertainties, rising needs of better infrastructure, modernized methods of agriculture and growing complexity of mining/manufacturing methods will boost demand for technologically advanced equipment in these industries. Moreover, looking ahead on the growth path, the emerging and developing nations will inevitably be an attractive destination for machine makers worldwide.

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