Exploring the state of the industrial sector
It’s been a tumultuous few years for the industrial sector economically, politically and technologically. While the industry struggled through a challenging 2015 and 2016, the market for industrial equipment has recovered to a robust state of health as we head into the second half of 2018.
A quick look back
Just two years ago, investment was inhibited by severe market uncertainty. Oil prices had crashed to below $30 a barrel at the start of 2016; China contributed to overcapacity in the commodities market; the UK announced Brexit, with the impending elections of other EU countries creating additional worries; the election of President Trump in the United States had introduced concerns on trade policies; China was struggling with overcapacity in its construction and industrial sector, with its production of industrial machines seeing practically no growth in 2016.
According to manufacturing PMI survey data, the global outlook in 2016 dropped to the lowest point since 2012, hovering just over 50 (indicating expectations of negligible expansion) (see Figure 1).
While there were challenges, there were also some bright spots. The automotive industry benefitted from the low price at the pump with the U.S. automotive sector seeing a strong return to production of larger higher value vehicles, such as SUVs. Similarly low feedstock prices were benefitting chemical producers, which had a knock-on benefit downstream to other sectors, particularly users and consumers of downstream chemicals and plastics. Lower oil prices also contribute to increased consumer spending.
The recovery in spending
The uncertainty at the end of 2016 lead to hesitancy in signing off on large capital investment decisions, with many companies adopting wait and see approach. The consensus was that the industry would struggle into 2017. However, as we moved into 2017 the business climate improved, with strong order books seen in the first half of the year. Initial apprehension that this was simply a period of restocking was replaced by confidence in a stronger market recovery as it became clear that conditions had improved.
The first half of 2018 has seen the market continue to perform strongly. Global machinery production is forecast to grow at over 4% in 2018, from $1,457 billion in 2017; similarly industrial automation market is forecast to grow to $209.8 billion in 2018.
A couple of factors impacting how industry will perform in the short-term are government initiatives to support industry along with the on-going recovery of the commodities sector.
China slowing but still strong
China’s influence on the global machinery market continues to grow, currently accounting for over a third of all machines produced in 2017. Whilst growth in China’s production of machinery plummeted in 2015 and first half of 2016 it showed signs of recovery in the second half of 2016 and growth rebounded strongly in 2017. This strong growth has been facilitated by the Chinese governments activity in infrastructure investment, such as the "The belt and road" initiative has led to significant increases in infrastructure construction and associated construction machinery. Ongoing investments in high-end industries, supported by national policies aimed at upgrading traditional industries, have continued to drive machinery demand as well as increasing levels of automation.
The outlook for growth for China’s machinery sector is expected to dampen in comparison to 2017, as the industry balances after strong bounce back in investment in the previous year. Even with a slowing the industry will continue to perform well posting annual growth above 7%. (See Figure 2)
A U.S. bounce-back
The US machinery and equipment market is also seeing a strong recovery from a challenging period between 2012 and 2016. Since 2017, there has been a reviving and retooling boost in manufacturing. The declining U.S. dollar has helped exports, which account for nearly 30% of U.S. machinery production, whilst it also provides a headwind against import penetration. A further boost to the machinery sector has been the expensing and bonus depreciation for machinery in the 2017 Tax Cuts and Jobs Act (TCJA).
Oil and commodities – a considered recovery
Recovery in machinery and automation investment in the oil and gas sector has been measured. Into the middle of 2018, oil prices have rebounded somewhat in June exceeding $75 per barrel and according to IHS Markit, oil prices are projected to average $71 per barrel in 2018. A forecast of $67 a barrel for 2019 is predicted as continued growth in production in the U.S. restrains prices. Whilst the recovery in the price of oil is a boon for suppliers of automation into this sector, the recovery in investment has been less significant than the original fall. Oil companies are operating more cost consciously and whilst on-shore and unconventional sites have started to see fresh investment, off-shore facilities are still struggling, faced with the higher costs of extraction.
Metal prices have also stopped declining; however, the market remains volatile, with uncertainty around recent trade actions by the U.S. While demand will continue to see solid and steady growth, a return to the high prices prior to the commodities crash is not anticipated.
A final look forward
While investment in industry continues to perform well, there is no shortage of low-probability/high-impact risks, this include: a sharp rise in inflation and interest rates, trade wars, China’s rising debt, Middle East conflicts, and stock market corrections.
The market will continue to perform strongly in the short term, albeit not quite to the levels of the recovery in 2017. Many companies are reporting full order books that will underpin growth into 2019. However, as we come to the second half for 2019 and into 2020, IHS Markit projects some dampening of growth as the market balances out any overcorrections.
Alex West is a senior principal analyst of manufacturing technology at IHS Markit, a CFE Media content partner.