Weak Outlook for German Machinery

The VDMA Group (an industrial association in Europe, representing small/medium sized companies in the engineering industry) said last week that German machinery producers do not expect an increase in output in 2010. The group said that more than two-thirds of producers in Germany are complaining about lack of orders.

The VDMA group forecasts a 20% year-over-year drop in machinery and factory equipment output for 2009 due to weak orders. For 2010, the group forecasts similar production levels as 2009.

According to the recent data released by the group, machinery and equipment orders for the month of July fell 43% compared to last year. Domestic demand was down 41%, while international orders declined 44% for the month. The industry’s production capacity stood at just 69% in July.

However, Germany, the world’s largest exporter, is witnessing improved order levels from developing economies, particularly China. According to VDMA, China has replaced the U.S. as the country’s biggest foreign customer. The report stated that China was the only major trading partner ordering more German-manufactured goods in the first half of 2009, while demand declined in all other export markets.

All major equipment makers around the world have been facing weak demand levels for the last year. Most of the industrial customers have been canceling or postponing their orders due to lack of positive sentiment about the economy and lack of credit availability.

Even the major U.S. machinery and industrial equipment makers such as Caterpillar (CAT - Analyst Report), Terex (TEX - Analyst Report) and Ingersoll-Rand (IR - Snapshot Report), have been reporting significant sales declines for the last few quarters.

Given the weak activity levels in the end markets, tighter credit conditions, and uncertainty regarding the economic recovery, we expect most of the industrial customers to hold themselves back from placing orders for the next couple of quarters. We do not expect a significant recovery in order levels before the second half of 2010.

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