A world economic recovery, as seen from equity market
improvements off 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 slowed down the overall growth
pace significantly in 2011. Lingering effects also impacted the
first quarter of 2012; however, the global economy has eventually
reverted to the recovery path, though obstacles still persist.
According to the World Economic Outlook published by the
International Monetary Fund (IMF) in April 2012, the world economy
is expected to grow roughly 3.5% in 2012 and 4.1% in 2013. Growth
in advanced economies is projected at 1.4% in 2012 and 2.0% in
2013, while it is anticipated that the emerging and developing
countries would grow by 5.7% in 2012 and 6.0% in 2013.
No doubt there exist some renewed concerns about the global growth
outlook following the recent run of weak reports from the U.S. and
India, but the overall growth picture may not materially
deteriorate from the IMF's April forecast.
Demand for the Machinery industry is correlated with increasing
economic activity, which stimulates demand for industrial products
and hence increases the need for new/advanced machinery. The major
end-markets for the machinery industry includes agriculture,
construction, mining and energy industries, among others.
Machinery Prospects Bright in the United States
The IMF projects the United States to grow 2.1% and 2.4% in 2012
and 2013, respectively. Increasing consumption, higher exports and
improved employment conditions despite recent evidence of softness
all bode well for the economy. Gross fixed capital formation is
projected to grow 4.8% and 5.9% in 2012 and 2013, respectively.
Machinery industry is one of the most attractive industries in the
United States. Growth prospects for this industry, as can be
deduced from the indicators to the performances in the recent past,
look promising. In the first quarter 2012, industrial production in
the United States rose by 5.4% while manufacturing output increased
by 10.4%. The US Census Bureau report indicates a 13.1%
year-over-year rise in machinery shipments and a 10.4% increase in
new orders. Machinery order backlogs at the end of the quarter have
End-market demand remains strong. In the first quarter, new orders
for construction and industrial machinery rose by 17.8% and 14.5%,
respectively. Orders for mining equipment were, however, down
17.5%. Farm machinery shipments rose 24%. Spending on construction
equipment increased in the quarter, including a rise in residential
and non-residential spending.
International demand for technologically advanced construction and
agriculture equipment is improving. The United States' construction
equipment exports rose 43% while agricultural equipment exports
registered a 23% increase in 2011, according to the Association of
Equipment Manufacturers (AEM). Overall, capital equipment exports
reached $160 billion, accounting for nearly 14% of the global
machinery market share in 2011.
Japanese Market Growing on Reconstruction
Japan's Cabinet Office reported a 0.9% increase in core machine
orders in the first quarter of 2012 as compared with the previous
quarter and a 3.3% rise from the year-ago quarter. Increasing
consumer spending and higher reconstruction activities have
accelerated recovery in the country. The government has projected
2.5% machine order growth for the second quarter of 2012.
Also, according to the IMF, the Japanese economy is projected to
grow 2.0% in 2012 and 1.7% in 2013.
Emerging Nations - Set for Growth
China and India, the two major emerging/developing nations, are
expected to show signs of tangible growth in the years to come.
According to the IMF, the Chinese economy is projected to grow 8.2%
and 8.8% in 2012 and 2013, respectively.
Looser fiscal and monetary measures by the Chinese authorities,
along the lines of Thursday's interest rate cut by the Chinese
central bank, are expected to offset some of the recent weakness in
economic data. Fixed Asset Investment has been on the rise over the
years, with a major share being invested in the machinery industry.
The country's domestic demand and investments will help in
offsetting lower export demand from its biggest export region, the
Industrial production in India has been weak in recent months, and
the first quarter GDP report was the weakest in years. However, the
country is projected by the IMF to grow 6.9% in 2012 and 7.3% in
2013. Demand for agricultural equipment is expected to rise in an
effort to modernize the existing farming techniques.
Korea's industrial output in the first quarter 2012 gained 3.7%
year over year; machinery investments increased 11.4%. However,
construction activities were weak in the quarter. The IMF predicts
the economy will grow 3.5% in 2012 and 4.0% in 2013.
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.
Other Major Players
As per data released by the Brazilian government, economic growth
in Brazil remains healthy; projected to grow from 2.7% in 2011 to
about 3.5% in 2012. 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 bode well for the
South Africa is also making progress; expected to grow 2.7% in 2012
and 3.4% in 2013, 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. According to a report published by Eurostat in May
2012, industrial production (excluding construction) in the
Eurozone fell 2.2% year over year in March 2012 and declined 0.3%
compared with February 2012. The capital goods formation growth
rate fell from 1.4% in February 2012 to 1.1% in March.
On a monthly basis comparison, industrial production in Spain fell
by 1.8% in March 2012, France -0.9%, Estonia -3.4%, Luxembourg
-1.9%, Denmark -2.8%, the Netherlands -9.0% and Ireland -2.7%.
However, industrial production in Germany and Italy grew by 1.3%
and 0.5%, respectively.
However, Construction output increased 12.4% in March 2012 compared
with the previous month, with the largest increase recorded in
Germany (30.7%). Output in France rose by 17.8%, Italy by 9.5%, and
in the United Kingdom by 14.8%.
Also, according to the VDMA machine makers association, German
machine tool orders in the first quarter 2012 plummeted 7%, with
domestic orders down by 1% and international orders sliding by 9%.
Important Players of the Machinery Industry
Deere & Company
) impressed with its record second quarter 2012 results and fiscal
2012 outlook. Equipment sales rose 13%; price realization
contributed 5%. The agricultural and forestry equipment provider is
expanding globally (capital spending expected $1.3 billion in 2012)
to leverage benefits from the growing global farm industry. Third
quarter equipment sales are expected to rise 25% y/y; net earnings
expectations for fiscal 2012 have been raised by 2.3%, primarily
accounting for growing needs of advanced equipment.
) equipment sales in the first quarter 2012 improved 25% y/y,
benefiting largely from higher mining activities and growing
replacement needs. The company raised its 2012 profit per share
expectation by 2.7% on better demand forecasts.
CNH Global NV
) posted a 22% increase in its equipment sales (agricultural and
construction) in the first quarter 2012. Worldwide agricultural
equipment retail demand in 2012 is expected to be flat to up 5% and
construction unit demand up 5% to 10%.
Other top players in the agricultural, construction and mining
The Toro Company
), among others.
Prime companies operating in machinery industries other than
agricultural, construction and mining, include
Rockwell Automation Inc.
Illinois Tool Works, Inc.
Manitowoc Company, Inc.
), among others.
Fiscal government expenditures play a counter-cyclical role curbing
the ill effects of slower economic developments and a tight credit
market. Recently, China has come forward with its structural
stimulus package for 2012. Government spending on social welfare,
construction of low-cost housing, completion of infrastructure
projects on agriculture, forestry and water resources received
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), when
approved, will boost spending in the infrastructure projects.
Approximately $260 billion will be allocated to fund roads, bridges
and highway projects over five years.
Another major event for the global economy is Russia, joining as a
World Trade Organization (WTO) member in 2012. The membership will
open the gates for companies worldwide to benefit from the growing
needs of 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
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 remain
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
Rising needs of better infrastructure, modernized methods of
agriculture and growing complexity of mining/manufacturing methods
will boost demand for technologically advanced equipment in those
industries. Moreover, looking ahead on the growth path, emerging
and developing nations will inevitably be an attractive destination
for machine makers worldwide.
AGCO CORP (AGCO): Free Stock Analysis Report
CATERPILLAR INC (CAT): Free Stock Analysis
CNH GLOBAL NV (CNH): Free Stock Analysis Report
DEERE & CO (DE): Free Stock Analysis Report
ILL TOOL WORKS (ITW): Free Stock Analysis
KUBOTA CORP ADR (KUB): Free Stock Analysis
MANITOWOC INC (MTW): Free Stock Analysis Report
ROCKWELL AUTOMT (ROK): Free Stock Analysis
TEREX CORP (TEX): Free Stock Analysis Report
TORO CO (TTC): Free Stock Analysis Report
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