Japan bearing orders: backlog lowest since December 2004

by SR on September 14, 2012

Japan bearing book-to-bill ratio (x)

Still getting worse

Earlier this week the bearing orders for July 2012 were released as an adjunct to the ESRI machinery orders, which I discussed in this post. Total bearing orders came to 54.79 billion yen, falling 14.3% year-on-year and rising 1.4% month-on-month. For the January to July 2012 period orders reached 388.1 billion yen, up just 1% year-on-year. Basically, everything apart from autos is having a bad year. Orders for bearings used in automotive applications have risen 30.7% January to July 2012 compared to the same period in 2011 (see chart below). Orders for all non-auto bearings have fallen 13.1% year-on-year for the January to July period.

Japan bearing orders for auto applications, billion yen

And even autos are slowing: cumulative orders for auto bearings rose 36.9% January to June 2012 compared to the same period in 2011 and rose 44.8% January to May 2012 over the previous year. This is only to be expected, but it means that autos will be less of an offset to weakness in demand from the machinery sector and from overseas.

As for the ratio of new orders to sales (the book-to-bill ratio – see chart at the top of the page) it was 0.95x, as shown in the chart above. When orders are lower than sales, that usually means lower sales and lower profits in the future, so a book-to-bill ratio above 1 is preferable. 0.95x is a nasty number. It’s not as bad as the 0.93-0.94-0.92 combination we saw in early 2011 that gave advance warning of the slowdown, and it’s better than the 0.94x of June, but it’s still not good.

The saving grace of the July orders (and of the past few months in general) is that orders have not crashed as they did in late 2008 and 2009. Orders plunged to 28 billion yen in January 2009 – a shocking number – and stayed below 30 billion yen until June 2009, when they hit 42.94 billion yen. So far, we’re not seeing anything like that.

Order book shrinking

Probably the worst figure of the lot was the order backlog, which fell to 145 billion yen. That’s the lowest order backlog since the 143.97 billion posted in December 2004. Even during the 2008-2009 financial crisis the backlog only hit 152.97 billion at its lowest point. Unless orders pick up, keeping capacity utilisation at sensible levels will become difficult and the companies run the risk of losing money.

Japan bearing order backlog (billion yen)

Stocks

Looking at the chart below, bearing stocks – NSK, JTEKT, Nachi-Fujikoshi and NTN – haven’t done conspicuously worse than other machinery plays, or at least not simply because they supply bearings. True, all four underperformed Topix in 2012 but then most machinery stocks are lagging the index. NSK is the best of the four, with its share price up 0.2% year-to-date. JTEKT comes next at -13.1%, then Nachi-Fujikoshi at -27.3% and NTN at -41.9%. Nachi-Fujikoshi is probably getting hit as the second-derivative trade on construction machinery in China: they supply hydraulic components to the CM assemblers like Sany Heavy. NTN is a big European play due to its acquisition a few years back of French bearing supplier SNR.

If you like machinery, look at Komatsu on the long side or short Keyence as a source of funds.
Japan machinery stocks, share price performance year-to-date

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