Machine Tool Jenga

By Lloyd Graff

IMTS is coming in a couple of weeks, so it is a good time to assess where the industry is right now.

It is apparent in retrospect that $100 oil was a bubble. It enabled a fracking boom in the United States and an oil sands boom in Alberta. Both have crashed and deflated, giving the machine tool industry a mega migraine.

Oil has rebounded from a low of $33 a barrel to almost $50 now. But the competition for market share between Saudi Arabia and Iran, two of the few producers who have extra capacity and can afford to sell at low prices, has kept prices down and discouraged new drilling in the U.S. and Canada. Big Oil’s offshore projects are starting to be played out, but Big Oil is just learning how to frack. The rig count (oil rigs in use) is rising slowly now, but not enough to move the needle much in the machine tool world.

The oil drop, and subsequent drop in machine tool sales in North America has once again demonstrated that the economy is like a huge Jenga game. Take one piece out of the infrastructure and the entire building can collapse.

Of all the machine tool builders Doosan of Korea may have been hit the hardest by oil’s fall. Doosan’s parent company has major financial problems in its home country and has finally sold the machine tool division, its most salable piece, to stay afloat. Several deals had broken down but a Korean venture capital group finally closed a deal in May.

Doosan has continued to build stock and has an enormous pile of machines in Long Beach, California. Some sources say they have 1000 machines sitting there, which explains their discounting. Doosan’s glut of machines naturally affects its competitors who have also suffered from the oil and gas downturn and price cutting.

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The auto industry has thrived over the past two years with gas prices hovering around $2 per gallon. Low interest rates and aggressive financing have buoyed sales around the magic 18 million per year mark. At the moment sales are trending down a bit, though light trucks and crossovers are still strong. The auto industry is not adding more plants here. Production in Mexico for cars and components is booming, but that is not helping the U.S. machine tool users much.

Medical manufacturing in America is decent, but the medical device excise tax is pushing some items offshore, particularly to China.

Homebuilding should be thriving in America now with 1.55% 10-year Treasuries but it isn’t because family formation is slow, young people are paying off college debts, and lending institutions are very tough about extending mortgages. The crash of 2007-2008 still overhangs the market and seems to affect every lending decision. We continue to hover around 1,150,000 annual housing starts, which means a mediocre market for fasteners, furniture and floor cleaners, thus fewer lathes and presses being sold.

Big companies have a lot of liquidity but they seem less focused on plant expansion and more on mergers and trimming costs. If one looks at the great business success stories of the last 10 years, few if any are in manufacturing. Amazon, Google, and Facebook do very little manufacturing. Apple makes almost everything in China.

The self-driving car appears to be coming soon. It will mean some changes in the way autos are made. Hopefully it will make for fewer accidents, which will mean fewer repair parts are needed. Unfortunately it also means less manufacturing.

Put it all together and it is not bad, but not really bullish for the machine tool industry in North America headed into IMTS 2016.

Maybe you have a different view?

Question: Do you prefer oil prices to be high?

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8 thoughts on “Machine Tool Jenga

  1. AvatarSteve Ignots

    I am probably an outlier here but I prefer prices to be low not because I like cheap gas (I do) but it keeps frakking from happening. I suspect years from now frakking will be seen as one of the biggest environmental screw ups of all time (I can see our grandchildren go ‘what were they thinking’?)

     
    +3
    1. Avatarallen

      You’re not alone on a preference for cheap oil and not just because it means cheaper gas.

      Oil, probably more then any other commodity, is central to modern society. It’s not just gasoline you make from oil but diesel fuel as well which impacts all sorts of stuff. Then there are all the zillions of important chemicals that are made from oil.

      As for fracking causing environmental problems no less then the EPA, not exactly a friend of hydrocarbons, gave fracking a clean bill of health. The environmental issues are wildly overblown for political purposes since they constitute a small percentage of the industry’s activities.

      If you want to know what’ll have our grandchildren scratching their heads with puzzlement its mandating of solar and wind power. That’ll be a tough explanation.

       
      +2
  2. AvatarSteve

    Wish oil would stabilize, maybe $60-$75, I think it would make things better overall.
    Not so much feast or famine

     
  3. AvatarDonnie

    The under lying problem with all of this is the Obama administration always tampering with America manufacturing, banking, and the cost of money. Let the laws of supply & demand work. Government is in the way. Just another 145 days and we get a new “tamperer”. Trying to make their mark in the history books.

     
    +4
  4. Avatarmike fassbender

    “cheap” oil is not good for the economy, or for manufacturing. Sure – people at the pump gain – but the rest lose out.

    i keep reading that “automation” is eliminating jobs . . . not so much doing the work elsewhere – any chance to talk about your take on that sometime, Lloyd?

    thanks

     
  5. Avatarallen

    I’d prefer a market price for oil as determined by supply and demand with as little interference from my moral superiors as possible.

    With a record of failure that’s uniform folks who have the power to interfere with markets never do a good job. Never.

    And that’s assuming good will and honesty. Sadly, most governmental market manipulation is done at the behest of those who see the potential for personal gain in those manipulations.

     
    +4

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