Recovery -- or the extent of recovery -- from the lows experienced since the 2008 global crisis is on everyone’s mind today. Achievement on this front, as witnessed from the equity market improvements, has been quite remarkable. But can we say the global economy has rebounded completely to its pre-crisis level?
Well, the pursuit is still on. The path to recovery has not been an easy one with ever-present headwinds hindering growth, the most disconcerting of which was the Eurozone debt crisis that significantly slowed down the overall growth pace in 2011 and 2012.
According to the International Monetary Fund’s (IMF) World Economic Outlook published in Apr 2013, promising signs to growth are expected from the world’s emerging and developing nations, while advanced economies are expected to exhibit slow but appreciable growth.
Projections by the IMF suggest that the world economy will likely grow by 3.3% in 2013 and 4.0% in 2014. Growth in advanced economies and emerging and developing countries are projected at 1.2% and 5.3% in 2013 while the same for 2014 are estimated at 2.2% and 5.7%, respectively.
No doubt obstacles still persist in the form of an unstable European economy and slowly reviving advanced countries; nevertheless, the overall growth picture may not materially deteriorate from the IMF’s Apr 2013 forecast.
Regarding the Machinery industry, increasing economic activities spur demand for industrial products, which in turn also boosts the need for new/advanced machinery. Based on this direct correlation, anticipation of improvement in global economic growth is a positive sign for the future prospects of the machinery industry.
The major end-markets for the machinery industry include agriculture, construction, mining and energy industries, among others. A brief discussion providing a glimpse of the future prospects of the machinery industry in different nations is provided below.
Machinery Industry Prospects in the U.S.
The IMF expects the United States to grow 1.9% in 2013 as against 2.1% predicted earlier and roughly 3.0% expected in 2014. High unemployment still seems to be a disturbing factor, though there is a glimmer of hope emanating from evidence of strengthening demands in the housing as well as durable goods markets. Conditions in the credit markets are also improving slowly.
The Machinery industry is one of the most attractive industries in the country. Growth prospects for this industry can be deduced from the indicators to the performances in the recent past. In the first quarter of 2013 (Jan-Mar), industrial production in the United States rose by an annual rate of 5.0%, while the same in the month of April rose by 1.9% as compared with the year-ago period. Manufacturing output grew 5.3% in the quarter.
According to the US Census Bureau report published in May 2013, machinery shipments in the first quarter 2013 increased 6.0% year over year while new machinery orders grew 3.6%. However, machinery order backlog at the end of the quarter was down 12.5%. Shipments for construction and industrial machinery rose by 40.0% and 18.2%, respectively, while that for mining equipment and farm machinery dipped 3.7% and 8.0%, respectively.
Export demand has been considered crucial for the future growth prospects of the U.S. machinery industry. According to a report published by the Association of Equipment Manufacturers (AEM) in Feb 2013, the United States’ construction equipment exports rose 13% in year 2012, while agricultural equipment exports registered a 16% increase.
For the years to come, international demand for technologically advanced construction and agriculture equipment are expected to improve for the United States. In this respect, it is worth mentioning that the US-Russia trade bill will boost U.S. exports of construction equipment to Russia, the 11th-largest export market for U.S. construction equipment.
According to the latest report published by Japan’s Cabinet Office, on a monthly basis, core machinery orders in March 2013 grew a whopping 14.2%. Recovery in capital spending and higher orders from the shipping and electric power companies were the main drivers of the growth. Also, overseas demand for machinery grew 27.5% in March, indicating prospects of a solid demand growth in the months ahead.
According to the IMF, the Japanese economy is projected to grow 1.6% in 2013 and 1.4% in 2014.
China and India, the two major emerging/developing nations, are expected to show signs of tangible growth in the years ahead. According to the IMF, the Chinese economy is projected to grow 8.0% in 2013 and 8.2% in 2014.
Looser fiscal and monetary measures by Chinese authorities -- their efforts in increasing fixed asset investments along the lines of interest rate cut by the Chinese central bank -- are expected to boost growth. Domestic demand is strong as both consumption and investments have increased while exports are also on the rising trend.
Industrial production in India seems to have revived in the month of March 2013, registering an increase of 2.5% over the same month a year-ago. This also represents an increase from 0.5% growth registered in the month of February 2013.
According to the IMF, the country is projected to grow 5.7% in 2013 and 6.2% in 2014 fuelled largely by rise in domestic and external demand, expectation of policy improvements and less severe weather conditions.
Korea’s industrial production recorded a 0.3% decline in the month of March 2013 over the same month a year ago, according to the latest data released by Statistics Korea. Despite the decline, the country seems to be recovering slowly 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 March 2013 spurred 0.5% year over year. This upsurge, despite weak economic conditions around the globe, especially of the Eurozone, is likely to impact the overall growth in the country.
Other Major Players
Talking of other important players worldwide, upcoming sporting events to be held in Brazil -- which call for rising government spending to improve the country’s infrastructure, growing trade relations with other economies, as well as huge foreign direct investments -- all bode well for the economy. According to the IMF, the country is expected to grow 3.0% in 2013 and 4.0% in 2014.
South Africa is also making progress and is expected to grow 2.8% in 2013 and 3.3% 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 May 2013, industrial production (excluding construction), on a monthly basis, in the Eurozone grew by 1.0% in March 2013.
On a year-over-year basis, industrial production in March dropped 1.7%, including a 6.9% in Luxembourg, 5.2% fall in Italy and 4.1% in Ireland.
Construction output, on a monthly basis, fell 1.7% in Mar 2013. On an annual basis, production dropped 7.9% in Mar, including a 31.8% decline in Slovenia, 16.7% in Portugal and 16.9% in Poland.
According to the VDMA Machine Makers’ Association, German machine tool orders in March 2013 plummeted 4.0% year over year, with domestic orders down by 15% and international orders slightly increasing by 1.0%.
Important Players of the Machinery Industry
Deere & Company’s (DE - Analyst Report) fiscal second quarter 2013 (ended Apr 2013) results were impressive. For the quarter, equipment sales rose roughly 9%, with price realization contributing 3%. 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 third quarter by 3%. Net earnings for 2013 are projected to be approximately $3.3 billion.
Caterpillar Inc. (CAT - Analyst Report) posted an 18% decline in Machinery and Power Systems sales in the first quarter of 2013. For the year 2013, the company expects revenue to range within the $57-$61 billion range as against $60-$68 billion expected earlier due primarily to the expectation of weak demand for mining equipment.
Italy-based CNH Global NV (CNH) posted a year-over-year increase of 1% or 3% on a constant currency basis in its equipment sales (agricultural and construction) in the first quarter 2013.
Other top players in the agricultural, construction and mining industry includes: AGCO Corporation (AGCO - Analyst Report) , Toro Co. (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, are Rockwell Automation Inc. (ROK - Analyst Report) , Illinois Tool Works, Inc. (ITW - Analyst Report) , Manitowoc Company, Inc. (MTW - Analyst Report) , among others.
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.
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 a stumbling block 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, the growth path widens for the emerging and developing nations, which will inevitably be attractive destinations for machine makers worldwide.