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 significantly slowed down the
overall growth pace in 2011. Lingering effects also impacted the
first and second quarters of 2012.
According to the World Economic Outlook published by the
International Monetary Fund (IMF) in June 2012, the world economy
is expected to grow roughly 3.5% in 2012 and 3.9% in 2013. The
projection for 2012 is 10 basis points (bps) and for 2013 is 20 bps
lower than IMF's April forecast.
Growth in advanced economies is projected at 1.4% in 2012 and 1.9%
in 2013, while it is anticipated that the emerging and developing
countries would grow by 5.6% in 2012 and 5.9% in 2013.
No doubt obstacles still persist as can be deduced from unstable
European economy and slowly reviving advanced countries, the
overall growth picture may not materially deteriorate from the
IMF's June forecast.
Demand for the Machinery industry is correlated with 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 U.S.
The IMF expects the United States to grow 2.0% and 2.3% in 2012 and
2013, respectively. Increasing consumption, higher exports and
slightly 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,
The Machinery industry in specific and the broader factory sector
in general has been doing reasonably well during the economic
recovery. While momentum seems to be flagging a bit recently, the
group's growth performance has been one of the best in the economy.
In the second quarter of 2012, industrial production in the United
States rose by 4.7% while manufacturing output increased by 1.4%.
According to the US Census Bureau report, machinery shipments in
the first half of 2012 increased 11.1% year over year and new
machinery orders grew by 1.7% in the same period. Machinery order
backlogs at the end of the quarter escalated 12.5%.
In the first half of 2012, shipments for construction and
industrial machinery rose by 27.1% and 9.4%, respectively.
Shipments for mining equipment were up 7.2% while farm machinery
shipments rose 6.1%.
International demand for technologically advanced construction and
agriculture equipment is improving. The United States' construction
equipment exports rose 24% while agricultural equipment exports
registered a 29% increase in the first half of 2012, according to
the Association of Equipment Manufacturers (AEM). In 2011, capital
equipment exports reached $160 billion and accounted for nearly 14%
of the global machinery market share.
Japan's Cabinet Office reported a decline of 1.7% year over year
and 1.4% sequentially in core machine orders in the second quarter
of 2012. However, on a monthly basis, June recorded 5.6% monthly
growth and July witnessed a 4.6% increase in core machine orders.
Recovery through acceleration in consumer spending and
reconstruction activities failed to gain momentum as weak foreign
economies, especially Europe's debt crisis, stalled growth in the
Weak exports and uncertain global economic environment, partially
offset by recent months' results, affected the government's core
machine order forecast for the third quarter of 2012, reflecting a
4.8% year over year and 1.2% sequential decline.
According to the IMF, the Japanese economy is projected to grow
2.4% in 2012 and 1.5% in 2013.
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 8.0%
and 8.5% in 2012 and 2013, respectively.
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 weakness in economic data. Foreign Direct
Investments (FDI) flow into the country has slowed and exports have
weakened, especially due to slowing global economy while lack of
domestic demand for construction, mining and textile machinery
Industrial production in India has been weak in recent months, with
the released data showing a bare 0.1% annual growth in July. Poor
performances by manufacturing, mining and capital goods sectors
reflect weak domestic demand and exports were hurt largely by the
European debt crisis. According to IMF, the country is projected to
grow 6.1% in 2012 and 6.5% in 2013.
Korea's industrial production increase fell from 1.3% in May to
just 0.6% in June and then plummeted 1.6% in July. Weak exports due
to global uncertainties, especially the Eurozone crisis, hit the
economy hard. Attempts, including interest rate cuts by the central
bank of the country, are being made to infuse strength in the
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. However, weak economic
conditions around the globe, especially that of the Eurozone, has
impacted growth in the country, as can be seen from the decline in
the country's industrial production.
Other Major Players
As per data released by the Brazilian government, economic growth
in Brazil remains healthy with projected growth of about 4.0% by
the end of 2012 from 2.7% in 2011. 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
economy. According to the IMF, the country is expected to grow 2.5%
in 2012 and 4.6% in 2013.
South Africa is also making progress and is expected to grow 2.6%
in 2012 and 3.3% 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 as well as of the global economy. According to a report
published by Eurostat in September 2012, industrial production
(excluding construction), on a monthly basis, in the Eurozone
inched up 0.6% in July 2012 as compared with a fall of 0.6% in June
On a year-over-year basis, industrial production in July fell 2.3%,
including 7.3% fall in Italy, 5.4% in Spain and 5.3% in Greece.
However, increase of 18.4% was recorded in Slovakia, 5.3% in Latvia
and 5.1% in Ireland.
Construction output, on a monthly basis, fell 0.3% in July and 0.6%
in June 2012. On an annual basis, production dropped 4.7% in July,
including 18.3% decline in Slovenia, 18.2% in Portugal, 16.1% in
Spain and 14.2% in Italy. Offsetting the declines were 7.7%
construction output increase in Hungary, 3.0 in Bulgaria, and 2.2%
According to the VDMA machine makers association, German machine
tool orders in the second quarter of 2012 plummeted 20% year over
year, with domestic orders down by 8% and international orders
sliding by 26%.
Important Players of the Machinery Industry
Deere & Company
) was impressed with its record fiscal third quarter 2012 (ended
July 31, 2012) results and fiscal 2012 outlook. Equipment sales
rose 16%; and price realization contributed 5%.
The agricultural and forestry equipment provider is expanding
globally to leverage benefits from the growing global farm
industry. Fiscal year 2012 equipment sales are expected to grow 13%
year over year, after netting out 3% unfavorable currency
translation impact expected for the year. Net earnings are
anticipated to be approximately $3.1 billion.
) reported record results in the second quarter 2012. The company's
Equipment sales improved 23% year over year. The company raised its
2012 profit per share expectation from $9.50 to $9.60 on better
CNH Global NV
) posted 3% or 9% (constant currency basis) year-over-year increase
in its equipment sales -- agricultural and construction -- in the
second quarter of 2012. Worldwide agricultural and construction
equipment retail demand in 2012 is expected to be flat to down 5%.
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. 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 special
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
Russia becoming the 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
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 those industries. Moreover,
looking ahead on the growth path, the emerging and developing
nations will inevitably be an attractive destination for machine
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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