Japan bearing orders: better but still bad in May 2012

by SR on July 9, 2012

Japan bearing order backlog (billion yen)

Japan bearing orders: a slightly better month

Japan bearing orders for May 2012 were disclosed today (2012-07-09) as an adjunct to the disappointing Japan machinery orders, on which I commented in this post this morning. Total bearing orders rose 6.6% year-on-year to 53.46 billion yen, eking out a 0.3% month-on-month increase compared to the April 2012 total. The ratio of new orders to sales (the book-to-bill ratio: see below) rose to 1.01 times, which was a significant improvement over the alarming 0.94x posted in April. The book-to-bill ratio improved because sales plummeted (-7% MoM) rather than because orders rose, but sales do usually fall sharply in May relative to April, so it’s not all bad. The other mild positive was that the order backlog (see the chart at the top of this page), which had fallen month-on-month for six consecutive months, finally posted an increase, albeit one of just 0.3%. Those sequential declines were reflecting the way the bearing companies were burning through the backlog as they converted their order book to sales without sufficient inflow of new orders to maintain the backlog.

Japan bearing book-to-bill ratio (x)

Continuing in this vein of “not all bad”, you could argue that because total manufacturing orders for Japan machinery are down 0.9% YoY for the January to May 2012 period, whereas orders for bearings are up 9% year-on-year over the same duration, bearings are actually doing all right. Well, there’s something in that, but my counter-argument would be that one would expect bearing orders in 2012 to be better than 2011, given that demand and supply were both affected by the Northern Japan earthquake of March 2011. If we exclude all automotive orders from the total order figure, we end up with the chart below, which shows that non-auto orders are down solidly year-on-year from January to May 2012. Auto-related bearing orders are up 44.8% YoY, year-to-date in 2012 (obviously flattered by the very weak first half of CY2011) while all “non-auto” related orders are down 6.9% YoY as shown in the chart below.

Japan bearing orders excluding auto-related, cumulative (billion yen)

Look at the chart below to see how machinery is starting to fall out of its usual seasonal pattern. Machinery-related bearing orders have now been worse than seasonality for two months and the angle of that red line (2012 orders) is ominous. A colleague of mine dismissed my concern with an airy wave of his hand and the argument that these figures are already out of date. He has a point – some equipment ordered in May will already have been delivered in June – but only up to a point, because there are plenty of products out there with lead times of 3-6 months and some even longer. Given its forward-looking nature I’d still say that this is the closest thing to “live” data with decent breadth that we have.

Japan bearing machinery-related orders by month (billion yen)

My colleague feels we should be making big macro calls on the key geographical markets rather than obsessing over the day-to-day minutiae. Apparently others feel the same way. Richard Wilmot is a fund manager at the Newton UK Equity fund and he was quoted in the FT as saying that he has gone back to “good old-fashioned investing” with a five-year time horizon. I applaud this attempt to turn back the clock to a more rational age, but I wonder how many pension clients really have the stomach to wait five years for decent returns. Until others follow Mr. Wilmot’s suit, we’re going to have to keep poring over the tea leaves of industrial data for hints as to the future direction of demand.

And bearing stocks? NSK, NTN, JTEKT? I would leave them alone for now.

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