Japan machine tool orders: Bottoming out?

by SR on November 14, 2012

Year-on-year change in cumulative Japan machine tool orders in 2012

We might be close to the bottom

Last month when we looked at the Japan Machine Tool Builders Association order figures, I concluded “Not getting any worse”. Having inspected the October 2012 figures (announced on 12 November 2012) I’ve arrived at the same view: the situation seems to be stabilising. That may not sound exciting, but as the chart above shows, we have notched up 5 consecutive months with no worsening in the state of orders versus the previous year. After the difficulties of the past few quarters, that’s a welcome – and promising – respite.

Why are machine tool orders important? Machine tools are used to make machines and so represent the tip of the spear of investment in the industrial base. If you want to raise output, you’ll typically need more machine tools or newer machine tools to achieve that goal. The Japanese (along with the Germans) are the global leaders in machine tools, although China is the largest market. Moreover, machine tools have long lead times, at least three months and in some cases six or even nine months. In that sense, signs that machine tool orders are stabilising is a positive indicator of sentiment among industrial customers.

Machinery and machine tool stocks

The problem with machine tool stocks is that compared to giants such as construction machinery play Komatsu their liquidity is limited, which makes them tough to hold for many institutional investors. The stocks that are on most investors’ radar screens in this area are Mori Seiki, Okuma, Makino Milling and Amada. You could include companies like Tsugami and Brother Industries in that list, but those two tend to perceived as tech-related (specifically smartphone-related) stocks. For my money, I think something like Komatsu makes more sense. The company did not revise down guidance when it announced Q2 results on 30 October, suggesting tha the bad news for 2012 is in the price. Moreover, if the US construction market is beginning to recover – as suggested by yesterday’s results from Home Depot – then this could start to move the stock. Komatsu is also a hedge against a recovery in China now that the new leadership of that country is taking shape.

Change in share price for Japan machinery stocks year-to-date in 2012

Year-to-date, the machine tool stocks have generally struggled, as shown in the chart above, which depicts the change in the share prices of 30 machinery stocks listed in Japan. From January to yesterday, Mori Seiki, Brother, Amada and Makino are all in the bottom quartile while Okuma and Tsugami – the “best” of the machine tools – have underperformed TOPIX significantly. On the other hand, since the previous order announcement on 12 October 2012, Amada’s share price has risen 18.9% and Makino’s is up 17.4%. As Makino Milling revised down its full-year guidance on 31 October and Amada had cut its guidance on 20 October, maybe these stocks are rallying on the idea that the bad news is all out, but if that is the case why are peers such as Mori Seiki, Okuma and Tsugami flat for the past 30 days or down like Brother and OSG? Well, there’s no need to assume that the market is rational over the short term, so let’s just shrug our shoulders and move on.

The October order figures in brief

Total orders in October 2012 came to 93.34 billion yen, falling 6.7% year-on-year and down 12.2% month-on-month. The only split we have at this point is between domestic and overseas orders and here domestic fared worse, with orders falling 13.4% YoY to 27.45 billion yen. Overseas orders held up better, contracting just 3.6% YoY. Month-on-month domestic fell 11.5% and overseas was down 12.5% – much of a muchness. Incidentally, that month-on-month decline of 12.2% is a weak figure, as the long-term median change for October from 2000 to 2011 was -4.4%. Weak, but I doubt it comes as much of a surprise.

What the chart below shows is that up to October, 2012 orders (the red line) are below 2011 orders (the blue line) but that the gap has been holding stable for the past five months.

Japan machine tools, cumulative orders year-to-date (billion yen)

Not every region is struggling

Looked at on a regional basis, there are some interesting differences. Note that we do not yet have the breakdown by region for October, only as far as September 2012 – the detailed figures for October will come at the end of this month.

First let’s look at Japan. Orders have come under pressure over the past few months, although earlier in the year the gap between 2012 orders (the red line) and 2011 (the blue line) was small. Unlike forklifts or construction machinery, there is no major boost to machine tool demand related to the reconstruction program caused by the North Japan earthquake. And in general, the economy is struggling as the most recent GDP data show.

Japan machine tools, cumulative orders from Japan (domestic) year-to-date (billion yen)

Let’s move on to China in the chart below. It’s not great, but with a decline of just 3.3% from January to September 2012 relative to January-September 2011, it’s a lot better than the general feeling of gloom-and-doom towards China would have you think.

Japan machine tools, cumulative orders from China year-to-date (billion yen)

Now below we have Asia excluding China. This looks pretty good.

Japan machine tools, cumulative orders from Asia ex China year-to-date, (billion yen)

There are two reasons for the strength in Asia. Although the Korean and Taiwanese markets for machine tools have been weak (Korea especially) orders from Thailand have soared by 43.6% year-on-year from January to September 2012 (again, detailed October 2012 figures will not be out until late November 2012). This is clearly auto-related demand, some of which would have been to replace equipment damaged in the floods at the end of 2011.

Japan machine tools, cumulative orders from Thailand year-to-date (billion yen)

The other explanation for strength in Asia excluding China is ‘Other Asia’, which is mostly Indonesia. Again, this is likely auto-related. Orders +66% YoY up to September 2012! The total value of orders is still quite small, however.

Japan machine tools, cumulative orders from Other Asia year-to-date (billion yen)

Europe is predictably weak, down 27.3% year-on-year. Germany – by far the single largest market within Europe – is also down by about that amount.

Japan machine tools, cumulative orders from North America year-to-date (billion yen)

By comparison North America has been remarkably strong. Orders from the US have increased by 5.3% YoY, which is decent.

Japan machine tools, cumulative orders from North America year-to-date (billion yen)

Canada does have its Ontario-based auto production of course, which will help support machine tool demand, but orders from Canada in 2012 (up to September) are 5.4% below 2011 levels. What really stands out is Mexico, where orders year-to-date in 2012 are up 27.4% over 2011. In absolute terms Mexico has posted 15 billion yen in orders year-to-date, which is a fraction of the 156 billion in orders coming from the US over the same period, but the torrid rate of growth in orders from Mexico means that it is having a significant effect.

Japan machine tools, cumulative orders from Mexico year-to-date (billion yen)

Finally, note that South America is struggling. While the authorities in the Brazil, the powerhouse of Mercosur, have managed to stimulate the Brazilian auto and light truck market somewhat by manipulating incentives and taxes, that’s a difficult game to maintain for any length of time. Machine tools arguably show a truer picture of the state of business sentiment than auto sales and as you can see, it’s not a pretty sight. Orders in 2012 (the red line) are well below not only 2011 (the blue line) but also 2010 levels (the purple line).

Japan machine tools, cumulative orders from Latin America year-to-date (billion yen)

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