Industrial Manufacturing: Risk
In 2009, the massive collapse of productive investment and construction in industrialized countries and some emerging countries (Central Europe, Russia) jammed the brakes on the activity of mechanical engineering companies in most industrialized countries. The signs of a manufacturing production recovery apparent since autumn in conjunction with implementation of public investment projects will enable the sector to achieve a soft takeoff. But with the corporate investment outlook remaining somber, the sector will not resume strong growth in 2010. The various economic stimulus programs implemented by governments in emerging countries, especially China, have provided substantial support to companies. Remaining in force in 2010, these programs will continue to drive sector activity in the first-half of the year. Unless additional measures are taken, however, this dynamic will then begin to peter out.
The pace of improvement will be particularly rapid in some segments: heavy public works equipment as a result of infrastructure remediation and construction dynamism in emerging regions, specialized equipment associated with mining investment and farming and forestry operations in a context of rising raw material prices, equipment intended for a range of industries - energy, chemicals, pharmaceuticals, personal care, food, and telecommunications thanks notably to R&D investment. Conditions in segments like machine tools and specialized machinery associated with textiles and wood will, however, be more difficult. Investment in the automotive sector is expected to be concentrated in a few emerging countries (Brazil, China, India).
In the United States, the Obama administration's vast economic stimulus program targeting infrastructure remediation (roads, schools, airports, and so on) was not in full swing in 2009. But the various projects are expected to be up and running in the 2010 first half. The fiscal deficits that several states have been running could, however, limit the beneficial effects of the federal government's measures. The increase in new housing starts and builder spending recorded late 2009 will likely continue in 2010 thanks to the extension of the property sector support program through to April. The machine-tool segment is, however, expected to remain weak especially since it is not very active in export markets and will thus be unable to take full advantage of the dynamism in emerging regions. In the United States, as in Canada, the activity of manufacturers of equipment for the mining industry is expected to improve considerably with mining companies beginning to invest again since summer 2009 amid signs of improvement in raw material prices.
In Europe, Germany, Italy, and France dominate production. West European companies were hit hard in 2009 by the decline in orders from the euro zone and by the economic downturn in Russia particularly in the automotive sector. Rolling mills and foundries have suffered less, benefiting from time extensions to fill backlogged orders. Activities related to new energies have also fared relatively better. The collapse in Europe, centered on Germany, was all the more severe with the investment cycle having peaked just before the onset of the crisis. Similarly, with the sector booming in Central Europe before the crisis thanks to subcontracting dynamism (textiles and clothing) and local operations of many international operators (automotive manufacturing), the shock was commensurately violent. And the region's mechanicals sector will be unlikely to get above water in 2010. Debt ridden, companies will continue to suffer from the effects of the depreciation of their respective currencies, the trend reversal since spring 2009 notwithstanding.
The shock was also severe for Japanese mechanicals with corporate investment falling over 13%. Construction spending will be moderate and government support will focus mainly on the (household) demand side rather than the (company) supply side with the impact on industrial plant renewal consequently very moderate. The measures related to regional infrastructure projects and included in the recent 5th stimulus program should give the sector some breathing space. All the more so, with a specialization in electronics and machine tools, Japanese mechanicals will only partly capitalize on the dynamism in Asian emerging regions (intense competition from Chinese players). And its price-competitiveness in international markets will be increasingly handicapped by the yen appreciation against the dollar, Yuan, and euro if it continues throughout 2010.
The economic stimulus program implemented by Chinese authorities to spur domestic demand has indisputably been the most effective of all. It kick-started the local mechanicals industry by fostering investment in 13 key sectors and contributed to protecting jobs at the risk of creating formidable overcapacity for months to come. This policy will inevitably reshape the landscape in the sector after the support measures have produced their full effect. In 2010 as in 2009, they will continue to benefit mainly state-owned mechanicals industries operating in areas including urban investment, agricultural equipment, and automotives to the detriment of companies in traditional exporting countries, a trend moreover reflected by the current moderate growth of China's imports of productive equipment.
In Brazil, public infrastructure spending is expected to begin to surge in the run-up to the presidential election. But public-private investment partnerships will take form gradually. They will focus mainly on the oil and gas sectors with Brazil bent on becoming the world leading exporter of sugar cane-based ethanol bio-fuel. Investment is thus expected to focus on those sectors thereby benefiting farm and special equipment.
In Russia, the tightening of the credit supply available to companies and the drastic cutback in public investment undermined economic activity in 2009. A modest recovery is likely in 2010 with the fiscal consolidation measures taken by the government expected to impede investment in infrastructure and rural development. Cancellation of large property development projects will moreover affect the construction sector and debt-ridden companies will postpone productive investment.
Grading and description are forecasted for 2010. Updated on globalEDGE April 2010.
