Japan bearings: Overseas orders still plunging

by SR on March 12, 2012

On 12 March 2012 the Cabinet Office of Japan released machinery order data for January 2012. We follow the bearing orders part of this data release for reasons discussed below. Bearing orders came in at Y52.1bn (-10.8% MoM, -3.2% YoY). The main points were as follows.

  • Overseas orders were very weak. Overseas orders for bearings fell by 21.6% MoM in January 2012. This was much worse than usual seasonality and was the third worst figure for the month of January of the past quarter-century. It seems clear to me that machinery and not autos is to blame.
  • Autos, domestic machinery OK. Domestic autos were buoyed by rising production at Toyota and Honda while domestic machinery was supported, in my view, by replacement demand from Thailand and Northern Japan. Neither industry category performed significantly worse than typical seasonality in January.
  • Order backlog still declining. Although the order backlog for bearings is still some way above 2009 lows and is unlikely to fall that far, the backlog did contract once again in January 2012. I don’t expect a recovery for several months.
  • Book-to-bill ratio so-so, as expected. The book-to-bill ratio of bearing orders to bearing sales came in at 0.98x, which is below the desired level of 1x but is a good way off the danger-zone level of 0.94x or below (we explain this here).
  • Not convinced machinery is out of the woods. I understand the argument that you should buy cyclicals when the news is awful. And in a previous post (here) I acknowledge that I may have already missed machinery plays, some of which have risen sharply off their lows. The counter-argument is that cautious investors can continue to dislike and avoid a group of stocks for longer than bolder investors can remain solvent – and recently bought machinery stocks could easily plummet again if news flow wobbles. I would still favour auto parts and especially tyre stocks over machinery stocks unless we get more evidence of bottoming.

(Related stocks: JTEKT; NSK; NTN; Minebea Nachi-Fujikoshi; SKF; Timken; Komatsu; Hitachi Construction Machinery; Sany Heavy.)

Japan bearings monthly orders and sales

Japan bearings orders % YoY

Bearings is where it’s at

Although I don’t pay much attention to the headline figure for machinery as a whole (too large, too unspecific) I do watch the bearing orders because they are innately forward-looking: lead times for components of this kind can easily be 3 or 6 months. Nachi-Fujikoshi commented to me in the autumn of 2011 that they were telling customers not to expect shipment until the summer of 2012 for some components – and that was before the Thai floods generated replacement demand for wrecked equipment.

Overseas orders had 3rd worst January of past 25 years

I’ll let the chart do most of the talking here. The chart below shows just how weak January 2012 was in relation to January in previous years. (Click on figure below for larger image.) Overseas orders fell 21.6% month-on-month in January 2012 to Y16.8bn. That’s not as bad as the -48.8% MoM recorded in January 2009, in the teeth of the global financial crisis, or yet as weak as the 22.7% MoM fall posted in January 2001. Still, it was a very poor number, the third-worst since our data begins in 1988. Year-on-year, orders fell by 17.9% in January 2012. That was an acceleration compared to the 11.8% YoY decline posted in November 2011.

We have no quantitative data on the composition of overseas orders, but given that autos and general machinery make up 65% and 25% of domestic orders respectively, I would imagine that these two markets make up the bulk of overseas orders. Moreover, given that auto production seems to be fine and that Toyota’s rolling order plan is on track at a fairly high level, I suspect that overseas orders are being dragged down by significant softness in overseas machinery demand.

Japan overseas bearing orders for month of January 1988-2012

Japan overseas bearing orders % MoM change 1988-2012

Auto, domestic machinery orders were just fine

That auto bearing orders showed no weakness in January 2012 should come as no surprise. Toyota and Honda are still trying to rebuild production after the disruptions caused by the widespread flooding in Thailand in October and November 2011. Orders for bearings for automotive use fell by 3.3% month-on-month in January (to Y21bn) compared to a long-term median value of -3.4% MoM. Nothing to see here folks, move along now.

Orders for bearings used in general machinery in Japan were pretty solid too, falling 3.6% MoM (to Y8bn) compared to a long-term median decline for the month of January of 2.9% MoM. In line with typical seasonality, in other words. Why should this be, if – as I argue above – overseas machinery is weak? I can think of two contributory factors. First, I believe that Japanese machinery suppliers are benefiting from replacement demand from Thailand, where their customers i.e. Japanese manufacturers are probably over-represented compared to their European and US competitors. Second, there is probably some replacement demand related to the rebuilding of facilities in Northern Japan that were damaged by the earthquake one year ago. (Click on figure below for larger image.)

Japan auto bearings orders % MoM change

Japan general macihnery bearings orders % MoM change

Book-to-bill holding up at 0.98x

This isn’t a great figure, admittedly, but at least it isn’t plunging. As I explained in this post, the BB ratio for Japan bearings collapsed in fairly shocking fashion in early 2011 (before the Tohoku earthquake, not after) which in turn was months before the stock market took its swallow-dive. So I like to monitor this as an early-warning signal. Anything around or below 0.94x should be treated very seriously, but the 0.98x of January 2012, while not great, is not particularly worrying. (Click on figure below for larger image.)

Japan bearings book-to-bill ratio (x)

Backlog declining, still some way off 2009 lows

The order backlog for January 2012 contracted to Y158.6bn. This is still some way above the levels of 2009, when the backlog notched up 6 months below Y155bn and hit a low of Y152.9bn, but is clearly not very good. My best guess is that the BB ratio bottoms out in the Y156-157bn range but that it doesn’t post a meaningful recovery for some months yet. (Click on figure below for larger image.)
Japan bearings order backlog (billion yen)

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