Japan bearing orders April 2012: not good

by SR on June 14, 2012

Ugliness abounds: book-to-bill returns to crisis levels

Japan bearing book-to-bill ratio (x)

  • Conclusion: April 2012 bearing orders are worryingly reminiscent of early 2011. There wasn’t much to like about the April 2012 Japan bearing orders, which were released as an adjunct to the Japan machinery orders out yesterday (2012-06-13). Among the things that concerned me were (a) the bearing book-to-bill ratio falling to 0.94x, a dangerously low level (b) the overseas bearing orders posting an unusually sharp decline in April compared to March i.e. much worse than usual seasonality (c) the order backlog falling to levels below those recorded during the global financial crisis of 2008-2009. The only positive thing I saw was seasonally normal behaviour in orders for auto bearings, which is reassuring. But that aside, an unambiguously poor set of figures. Clearly you want to avoid JTEKT, NSK and NTN, although the share price of the latter has already been smashed. The ongoing investigation by the Japanese anti-trust authorities into allegations of price-fixing in the bearing industry is not helping matters. Look for “pure” Toyota auto parts plays instead – Denso, Aisin Seiki, even Toyota Boshoku.

Auto bearings the only star

Total bearing orders in April 2012 rose 13.9% YoY to 53.3bn yen, but fell 14.9% MoM. Year-to-date from January to April 2012, bearing orders have reached 225.8bn yen, +9.6% YoY. On the face of it, these are solid results. However, auto bearing orders account for the largest part of the total and these rose 83.2% YoY. Year-to-date, auto bearing orders are up 42.6% YoY over the January to April 2011 period. In the chart below, the red line (2012) shows orders to be ahead of 2009-2011 and not far behind those of 2008 (the green line).

Auto-use bearing cumulative orders, January to April 2012 (billion yen)

The other major component of orders is overseas bearing demand, which is down 12.3% year-on-year on a cumulative basis. As the chart below shows, cumulative bearing demand from outside Japan is below that of 2011 (the blue line) and 2008 (the green line) and is level-pegging with 2010 (the purple line), which was not a strong year.

Cumulative orders for bearings from overseas, January to April 2012 (billin yen)

Japan machinery bearing orders are up 4.5% YoY in cumulative terms, but this is less than the +7.7% YoY recorded up to March 2012 or the +5.4% YoY recorded up to February 2012. Actually things could be a lot worse for machinery bearings and I’m kind of surprised that orders have held up as well as they have. I suspect that this resilience is the result of replacement machinery demand from Northern Japan, where many production facilities were devastated by the earthquake and tsunami of March 2011, and also due to a gentle recovery in auto capex and a much stronger surge in auto production.

Machinery-use bearing cumulative orders, January to April 2012 (billion yen)

Overseas orders post second-worst April since records begin

April is typically a down month for Japan bearing orders from overseas, so I wasn’t expecting much. However, the 20.2% MoM decline was disturbingly weak. That overseas bearing orders fell 16.4% YoY despite an easy comparison with 2011 was bad enough, but of all the months of April since 1988, only April 2005 has posted a larger month-on-month fall (-23.4%). As the chart below shows, the median month-on-month percentage change for April since the year 2000 is -4.5%.

Japan bearing overseas orders, month-on-month change for April

Backlog keeps sliding, will put sales under pressure

Japan bearing sales held up fairly well in April 2012, rising 12.2% YoY. For the year to date bearing sales are up 7.2% YoY. Don’t be fooled by this apparent strength; sales are being supported by the order backlog and this explains why the order backlog is falling so rapidly. Indeed, the bearing companies are chewing through their aggregate order backlog far more quickly than they can replenish it with new orders. This generates revenue and profits but if bearing orders are not flowing in then at some point in the future bearing sales will likely see a sharp contraction. This is of course why we watch the book-to-bill ratio mentioned earlier: it gives us an indication of order inflows compared to order consumption.

Japan bearing order backlog (billion yen)

Below we have another view of the same data. This one emphasises the changing monthly movement in bearing orders from year to year. Note the way the order backlog has taken a dive over the past few months of 2012 (the red line) and is now at, indeed slightly below, 2009 trough levels (the orange line). This is worse than I expected even a few months ago. The backlog has now fallen compared to the same month of the previous year for 13 consecutive months.

Japan bearing order backlog (billion yen)

Here’s a thought: things could be much worse. Starting in March 1991 the bearing order backlog posted 38 (yes, thirty-eight) consecutive months of year-on-year contraction. Let’s hope this time it doesn’t get that bad. On a slightly more positive note, back during that recession the bearing order backlog peaked in August 1990 at 151.5bn and hit bottom at 84.9bn in December 1993. That was a decline of 43.9% peak-to-trough. Measured from the September 2008 peak of 221.2bn, the 152.9bn in order backlog posted in April 2012 implies a decline of 44.6%, so maybe we are already close to the bottom.

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