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.
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?