Machine tool consumable demand surging?

by SR on July 2, 2012

Japan machine tool orders

A local Japanese newspaper reported that OSG is investing 1 billion yen in its Yana factory, near Shinshiro City in Aichi prefecture. The capex is being used to raise output for taps, which are used to create the threaded (female) part of a screw/nut or similar combination. Typically these parts are used in machine tools and OSG claims a global market share of 30%, making it the No.1 supplier. The article says that the company simply cannot keep up with demand for taps at the moment and so needs to raise monthly production capacity from 1.4m/month at the end of November 2011 to 1.6m taps per month by the end of November 2012.

In this area OSG has numerous Japanese competitors, many of which are privately held (such as Sakai, Tanoi, Ishihashi and Ohoka) but some are listed, one such being Nachi-Fujikoshi. In addition OSG has overseas rivals such as Kennemetal of the US and Sandvik of Sweden. OSG looks to be a decent little medium-cap, trades about $2.5 million a day in these low-volume times and has a market cap of about $1.4bn. The operating profit margin for the most recent quarter was 15.5%, so the firm seems to have a differentiated product whereby it can add value.

I’m surprised to hear that demand is this strong but I suppose the key issue here is that taps, like bits (see PCB drill bit specialist Union Tool) are effectively consumables rather than capex items. If production of major items such as autos increases, then we should expect to be seeing rising demand for taps and dies. I couldn’t find a breakdown of OSG’s revenue by end market, but given that the company is based in Aichi prefecture, the home ground of Toyota, I would imagine that the effects of soaring production at Toyota are positive. I’ll have a look at the order data for machine tool parts over the next day or so. For me, autos and auto parts stocks are a better place to park your money.

Demand for the machine tools in which OSG’s products are used is a capex issue. While machine tool demand seems to be firmer than weak demand for bearings, it doesn’t look that impressive, in my estimate. Compared to bearings, orders for machine tools from overseas seem to have held up better, with 2012 orders (the red line) tracking only a little way behind 2011 (the blue line) and 2008 levels and well ahead of 2010 (the purple line). By contrast, overseas orders for bearings in 2012 are behind the same period for 2011, 2008 and just level-pegging with 2010.

Japan machine tool overseas orders

Japan machine tool overseas orders

Cumulative orders for the entire machine tool sector in 2012 (the red line) are just slightly behind orders for 2011 (the blue line) and still a long way ahead of 2010 (the purple line). The gap to 2008 levels remains significant.

Japan machine tool orders

The order backlog for machine tools is definitely holding up better than that of bearings.

Japan machine tools order backlog

Previous post:

Next post: