Transcript Laser Welding Aluminum Alloys

Industrial Markets Outlook:
The Search for the New Normal
Speech to AMT GLOBAL FORECASTING
and MARKETING CONFERENCE
Eli S. Lustgarten
Senior Vice-President, Longbow Securities
OCTOBER 20, 2010
Eli Lustgarten
1
2
WHAT WE SAID IN 2009 APPEARS TO BE TRUE
• OUR VIEW: THERE’S 2010 AND THERE IS THE RECOVERY
• 2009 SEVERE RECESSION WITH 1H09 GLOBAL ECONOMY REALLY UGLY
 U.S.PMI PLUMMETTED AS DID EUROPEAN AND CHINA PMI
 CREDIT FINANCIAL CRISES MET WITH MASSIVE STIMULUS PROGRAMS
 BOTH HERE (U.S. $787B, TALF,TARP) AND
 ABROAD (SOUTH AMERICA $775B; EUROPE/AME $900b; ASIA PACIFIC
$850B)
 RECESSION LIKELY ENDED MID 2009 FOLLOWED BY MODEST
RECOVERY
• 2010 MOST LIKELY A TRANSITION YEAR
 MFG.CAPACITY UTILIZATION OF AROUND 70% WELL BELOW NORMAL
 2010 WILL FAVOR SHORT CYCLE/PRODUCTIVITY SPENDING
 FASTER RECOVERY OF TECHNOLOGY,COMPONENTS AND
CONSUMABLES
 BULL-WHIP EFFECT IS KEY DRIVER-RECOVERY OF PRODUCTION AND
SUPPLY CHAIN FROM VERY DEPRESSED LEVELS
• 2011 ECONOMIC OUTLOOK DEPENDENT ON REAL GROWTH IN DEMAND
• 2011-2012 SEARCH FOR NEW NORMAL LEVEL OF DEMAND
 MOST MARKETS WON’T RETURN TO RECENT 2006 to 2008 PEAKS
 2006 WAS PEAK FOR HOUSING, AUTO, TRUCKS, CONSTRUCTION
EQUIPMENT
3
GREAT GLOBAL RECESSION APPEARS TO BE OVER
 Great Recession likely ended in June/July 2009 followed by a gradual economic recovery
 Strong growth in China, India, and Brazil leading global economic upturn
 U.S. is generally positive with clear strength in manufacturing
 Europe and Japan show signs of slow economic growth
 Numerous concerns which may lead to volatility in world financial markets
 Uncertain financial stability of Sovereign Nationals, particularly Greece, Portugal, Spain,
and Ireland;
 Even in the U.S. there are rising concerns about Fannie/Freddie and State Financial
conditions e.g. California, New York, Illinois
 What is the exit path for all the fiscal/monetary stimulus
 Concern over Bank exposure to commercial real estate
 Domestically, economy being driven by:
 Capital goods markets leading the U.S. recovery with the manufacturing ISM Purchasing
Managers Index (PMI) showing a strong “V” shaped recovery
 Inventory change has become a key contributor to GDP growth
 Residential markets are sluggish since incentives have expired
 Sentiment has improved modestly across the U.S. economy
• University of Michigan 2010 Consumer Sentiment survey rose to 76 in June before
falling to 67.8 in July, up to 69.8 in August, down to 68.2 in Sept. and 67.9 in October.
• Small Business Optimism Index between 87 and 92 in 1H10 (Sept. 92.9;Oct 87.5)
4
C&I LOAN DATA SHOWS CREDIT STANDARDS
LOOSENING AS RECESSION ENDS
C&I LOAN DATA – 1990 TO PRESENT
U.S. ISM PMI HAS SEEN A SHARP RECOVERY
BUT STARTED TO PULL BACK FROM HIGHS
U.S. ISM PMI INDEX – 1992 TO PRESENT
EUROZONE AND CHINA PMI
HAVE ALSO SEEN STRONG RECOVERIES
EUROZONE PMI AND CHINA PMI - MARCH 2006 TO PRESENT
GDP REVISION SHOWED WEAKER
ECONOMY BUT SAME END TO RECESSION
• Economy was weaker over the past three years driven by weaker housing and
consumer spending.
Year
Reported GDP
Revised GDP
2007
2.1%
1.9%
2008
0.4%
0.00%
2009
-2.4%
-2.6%
• But recession likely still ended in Mid-2009
QUARTER
INVENTORY
% GDP
FINAL SALES
PCE
1Q09
-$125.8 B
-2.5%
-3.9%
-0.5%
2Q09
-$161.8 B
-1.4%
0.2%
-1.6%
3Q09
-$128.2 B
1.1%
0.4%
2.0%
4Q09
-$36.7 B
2.8%
2.1%
0.9%
Productivity is STRONG coming
out of recessions
Date
1975
1980
1983
1991
2002
2009
After Recession
2Q
4Q
1Q
2Q
1Q
2Q
9
Growth
6.5%
4.4%
5.1%
5.9%
7.2%
8.4%
PRODUCTIVITY GAINS HAVE BEEN SIGNIFICANT SINCE 2Q09
DRIVING 2009-2010 EARNINGS SURPRISES
 Productivity usually weak in a recession
Date
Productivity
1981
0.16%
1991
0.23%
2001
3.60%
2008/09
3.50%
 Productivity improved since 2Q09 while costs plummeted
Date
Productivity
Unit Labor Costs
2Q09
8.4%
0.6%
3Q09
7.0%
-3.3%
4Q09
6.0%
-4.2%
1Q10
3.9%
-3.7%
2Q10
-0.9%
0.2%
10
IMPROVED PRODUCTIVITY SEEN IN
PROFITABILITY REBOUND
• Increased productivity evident in strong operating margin
rebound for many companies, post 2009 restructuring
• Margins for many are approaching 2008 levels, though
absolute earnings well below prior peaks due to lack of
revenue recovery
– In 2009 temporary (zero bonus pay-outs, furloughs, pay
reductions, travel restrictions, eliminate overtime) and
structural measures (layoffs, plant consolidations and
closings, increased automation ) used to reduce costs
– Structural measures will continue to offset the return of
temporary costs savings (about 60% of costs).
– Employee compensation (base wages, healthcare) likely
outpaces inflation, hiring will be kept in check
Sept. 2010
11
RECESSION LIKELY OVER BUT SLOW
RECOVERY UNDERWAY
3Q09
4Q09
1Q10
2Q10
Real GDP
1.6%
5.0%
3.7%
1.7%R
Inventories
1.1%
2.8%
2.6%
0.8%R
(in Billions)
-$128.2
-$36.7
$44.1
$68.8R
Final Sales
0.4%
2.1%
1.1%
0.9%R
Domestic FS
1.8%
0.2%
1.3%
4.3%
Net Exports
-1.4%
1.9%
-0.3%
-3.5%R
U.S. ECONOMIC OUTLOOK:
Recovery Beginning
 REAL GDP SLOW GROWTH
YEAR/YEAR
2005
2006
2007
2008
2009E
2010E
2011E
3.1%
2.7%
2.1%
0.4%
-2.4%
2.8%
2.5%
0.1%
2.6%
2.7%
4Q/4Q
 CAPITAL SPENDING TO SLOW
STRUCTURES
EQUIPMENT
AND SOFTWARE
BUSINESS FIXED
INVESTMENT
2004
1.1%
7.7%
7.3%
2005
1.5%
8.5%
6.5%
2006
9.2%
7.4%
2.3%
2007
14.9%
2.6%
-2.1%
2008
10.3%
-2.6%
-5.1%
2009E
-20.4%
-15.3%
-17.1%
2010E
-12.8%
14.1%
5.2%
2011E
0.5%
9.5%
7.0%
U.S. ECONOMIC OUTLOOK: (CONT’D)
 MANUFACTURING OUTPUT STARTING TO RECOVER:
YEAR/YEAR
2005
2006
2007
2008
2009E
2010E
2011E
4.0%
2.5%
1.4%
-2.2%
-9.2%
5.5%
4.5%
 INFLATION PRESSURES FURTHER SUBSIDE:
MFG IP
1Q
2Q
3Q
4Q
2008A
-1.2%
-5.4%
-9.3%
-18.1%
2009A
-22%
-9%
9%
7.1%
2010E
6.1%
7.9%
3.5%
4.5%
2005
2006
2007
2008
2009A
2010E
2011E
CPI
3.0%
2.7%
2.7%
3.8%
-0.3%
1.7%
1.6%
CORE
PCE
2.3%
2.3%
2.4%
2.4%
1.7%
1.1%
1.3%
IMPROVING OUTLOOK FOR GLOBAL GROWTH BUT
2011 GROWTH MODERATING
2006
2007
2008
2009
2010E
2011E
2015E
GLOBAL GROWTH
5.1%
5.2%
3.0%
-0.6%
4.8%
4.2%
4.6%
US
2.7%
2.1%
0.4%
-2.4%
2.6%
2.3%
2.4%
EU
2.8%
2.7%
0.6%
-4.1%
1.7%
1.5%
1.7%
GERMANY
3.0%
2.5%
1.2%
-5.0%
3.3%
2.0%
1.2%
FRANCE
2.2%
2.3%
0.3%
-2.2%
1.6%
1.6%
2.2%
ITALY
2.0%
1.5%
-1.3%
-5.0%
1.0%
1.0%
1.3%
UK
2.9%
2.6%
0.5%
-4.9%
1.7%
2.0%
2.5%
SPAIN
4.0%
3.6%
0.9%
-3.6%
-0.3%
0.7%
1.7%
CENTRAL/EASTERN
EUROPE
6.5%
5.5%
3.0%
-3.7%
3.7%
3.3%
4.0%
JAPAN
2.0%
2.4%
-1.2%
-5.2%
2.8%
1.5%
1.7%
CHINA
11.6%
13.0%
9.6%
8.7%
10.5%
9.6%
9.5%
INDIA
9.8%
9.4%
7.3%
5.7%
9.7%
8.4%
8.1%
RUSSIA
7.7%
8.1%
5.6%
-7.9%
4.0%
4.3%
5.0%
MID EAST
5.7%
5.6%
5.1%
2.4%
4.1%
5.1%
4.8%
BRAZIL
4.0%
6.0%
5.1%
-0.2%
7.5%
4.1%
4.1%
MEXICO
4.9%
3.3%
1.5%
-6.5%
5.0%
3.9%
4.0%
CANADA
2.9%
2.5%
0.4%
-2.6%
3.1%
2.7%
2.1%
*SOURCE:
IMF 1010
VIRTUALLY EVERY INDUSTRIAL END MARKET
WAS UNDER PRESSURE IN 2009
 Virtually every end market faced lower demand in 2009.
 Housing fell over 30% to about 900,000 starts in 2008 and is still looking for a
bottom. Housing suffered another 40% decline in 2009 to about 554,000 with
stabilization now occurring
 Auto outlook remained ugly with 2008 production about 12.6 million falling to
about 8.5 million in 2009 as the automotive bankruptcies were offset by the
cash for clunkers auto program.
 Construction equipment sales and production in 2008 were down 22% to 24%
with 2009 now down at least another 45% to 50% as export sales wane and
non-residential construction spending falls about 5% (down 11% private and
up 3.5% public) in 2009 and likely a similar amount in 2010.
 The heavy truck sector saw a decline in production to about 205,000 in 2008
compared to 212,000 NAFTA shipments in 2007, while the decline medium
truck (class 5 to 7) was 25% from 206,000 to 157,000 units. The lack of credit,
the recession and favorable reviews for the 2010 engines eliminated any
emissions related truck pre-buy with 2009 falling another 43% to about
118,000,units with a similar decline in the medium truck sector. There was,
however, an Engine pre-buy because of rising prices.
 Global steel demand plummeted 8% in 2009 after falling 1% in 2008 with
developed economies particularly hard hit: -36% U.S., -26% Japan, -29%
Germany; though China, the largest producer, grew 14% in 2009.
SLOW INDUSTRIAL CAPACITY
UTILIZATION RECOVERY IN 2010
 We have dug a deep hole to climb out of in 2010 and 2011
 Manufacturing Capacity Utilization is now in the Low 70’s compared to
more normal 78% to 80%
 Virtually Every Industrial Sector is Currently Over-Capacitized Globally
2010 WILL FAVOR SHORT-CYCLE,
PRODUCTIVITY & EFFICIENCY
 LITTLE NEED FOR CAPITAL EQUIPMENT FOR EXPANSION IN 2010
 Need to absorb excess capacity
 Only exception may be for new products
 Production increases mostly related to end of inventory liquidation;
production level will more closely match end market sales
 Smaller, lighter equipment likely to outperform heavy equipment which
could decline through 2010
 2010 WILL FAVOR ENERGY EFFICIENCY, AND PRODUCTIVITY
ENHANCEMENT
 FASTER RECOVERY FOR TECHNOLOGY, COMPONENTS (MRO
AND INVENTORY RESTOCKING) AND CONSUMABLES AS
INDUSTRIAL PRODUCTION RISES
 LENGTH OF BULLWHIP EFFECT IS KEY
CURRENT ECONOMIC DATA IS MIXED:
FOR NOW ITS SLOWER GROWTH NOT DOUBLE DIP
THE POSITIVES
•
•
A Major upward revision in personal saving rate coincided with a sharp decline in overall financial
obligations as a percentage of disposable income suggesting that the consumers are in better shape
than suggested by earlier data
– The savings rate peaked at 7% in 2Q09 and remained above 5% all year
– 1Q10 savings rate was 5.5%; 2Q10 was 6.2%; July 5.7% and August 5.8%
We are seeing decent real growth in 2Q10 GDP data in disposable income (4.4%), excellent
growth in exports (9.1%) and business spending for equipment and software (24.8%)
THE NEGATIVES
•
•
•
2Q10 growth in housing (25.7%) and state and local government spending (0.6%) is clearly
temporary.
– Consumer confidence indexes are consistent with stagnation in real consumption
– Housing still mired at low levels of 8 months ago falling back after end of new buyer
incentive programs
– New $26 B emergency legislation being passed to fund state and local governments to
prevent /limit layoffs—($16 B to fund Medicaid obligations and $10 B for teachers’ pay)
The current high level of inventory growth ($68.8B ) is likely temporary;
Poor July jobs reports with only modest August gains continues trend of slow recovery in
employment
THE CONSUMER IS STILL RELUCTANT
AND UNLIKELY TO LEAD
• CONSUMER SPENDING REMAINS SLUGGISH
PERSONAL CONSUMPTION EXPENDITURES:
2008
2009
2010
1Q
-0.8%
-0.5%
+1.9%
2Q
+0.1%
-1.6%
+2.2%
3Q
-3.5%
+2.0%
4Q
-3.3%
+0.9%
• LACK OF CONFIDENCE IN THE ECONOMY; Even the FED is concerned
• CHANGING CONSUMER SPENDING PATTERNS
 “just drop off the key, Lee, and set yourself free”-Paul Simon
 Apple up 94%; Starbucks 61%, Mercedes 25%--splurge in hi-end electrics
 P&G struggling as consumers cut back name brand shampoo and toothpaste;
 Dollar stores instead of Target
JOBS OUTLOOK: NO PENT UP DEMAND ANYWHERE
• JOBS OUTLOOK STILL GOING NOWHERE
– Private sector gains of 64,000 in September, a slowdown
from 93,000 in August and 117,000 in July
– Overall number negative 95,000 reflecting 159,000 decline
in Government jobs of all levels
– Flat hourly wages at $22.67
• BUT SOFTNESS BENEATH THE SURFACE
– Length of work-week barely budged in 6 months
– Number working part-time continues to climb
– 6,000 shrinkage of manufacturing jobs in Sept Vs. 28,000
decline in August; is uptick in Manufacturing over?
– Unemployment at 9.6%, but under-employment rises from
16.7% to 17.1%
Eli Lustgarten
21
A SLOWING OF MANUFACTURING MAY LIE AHEAD
•
•
September PMI of 54.4 compares to 56.3 in August, 55.5 in July, 56.2 in June, 59.7 in May, 60.4
in April, 59.6 in March, 56.5 in February and 58.4 in January
– Orders of 51.1 in Sept, 53.1 in August, 53.5 in July, 58.5 in June, 65.7 in May and April,
– Production 56.5 in Sept.,59.9 in August, 57 in July,61.4 in June, 66.6 in May, 66.9 in April
– Employment 56.5 in Sept.,60.4 in August, 58.6 in July, 57.8 in June, 59.8 (May), 58.5 (April)
– Inventory 55.6 in Sept., 51.4 in August, 50.2 in July,45.8 in June, 45.6 (May), 49.4 (April)
– Customer Inventories are still low at 42.5 in Sept.,43.5 August, 39 July,38 in June, 32 May
– Ratio of Sept. production/Inventory of 1.02 (vs.1.16 in Aug) and orders/inventory of 0.92
(vs.1.03) continue to suggest an ISM PMI remaining over 50 but slowing.
Auto Sales are up (sensitive to incentives) but stabilizing resulting in likely lower 2H10 production
levels with potential for schedule reductions in 4Q
(in millions)
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Auto Sales
10.8
10.36
11.8
11.8
11.6
11.1
11.56
11.47
11.73
•
•
Global PMI continuing to Improve in Europe even with Sovereign Debt Issues; Euro 10% rebound
has quickly eliminated short-term currency advantage for their exports
China Growth continues but showing signs of slowing; PMI rebounds to over 50 in August
HOW MUCH LONGER WILL
THE BULL-WHIP EFFECT CONTINUE
•
•
•
•
•
Domestic manufacturing plummeted in the fall of 2008 as industrial production turned sharply
negative
– Capacity utilization dropped to the mid 60’s from near 80%
– ISM PMI index plummeted to a low of 32.9 in December 2008
– European PMI bottomed at 32.5 in February 2009; China was also down significantly
Manufacturers underwent an unprecedented inventory liquidation hitting a record $162B annual rate
in the second quarter of 2009.
THE BULL –WHIP (Forrester Effect):
– In heavier industries, the at least one-third drop in sales in most markets caused
– Production to decline by over 50% as inventories were sharply reduced
– Causing 50% to 75% or more declines in purchases of raw materials and components.
The positive BULL-WHIP effect began in late in 2009 and with earnest in F2010
– Industrial companies are trying to raise production and stabilize their supply chain much higher
levels than the trough of 2009 but well below production levels of 2006 to 2008.
– CAT: flat 2010 sales would result in a 10% to 15% production increase and a 30% to 40%
increase in supplier purchase
– Note: CAT’s sales are projected to rise 25% in F2010.
It appears that the bulk of the BULL-WHIP effect will taper out in 2H10 most likely by the fourth
quarter
SLOW CLIMB BACK TOWARD
MORE NORMAL DEMAND
• Real growth in demand will most likely be the driver of economic growth in 2011
– Supply chains will likely have been stabilized by 2011
– Focus is to improve Factory Thru-put to reduced field inventories
– Companies employ lean techniques striving to operate with reduced
inventory levels compared to history
• Impact of Government stimulus program will wane without a new round of
incentives
• Congress has bipartisan bill supporting extension of accelerated/bonus
depreciation rules set to expire at year end 2010. Proposed 1 year write-off of
Capital expenditures would bring demand forward in 2011 at expense of 2012
• Key risk is government policy mistakes
• Will movement to “Re-Shoring” effect to reduce the length of the global supply
chain have a material effect?
2011-2012: FINDING THE NEW LEVEL
OF NORMAL DEMAND
•
•
•
•
New more NORMAL level of demand perceived to be lower than end market demand realized in
2006-2008
– Auto unlikely to return quickly to 16 to 17 million car sales that prevailed from 1999-2005;
perhaps 12.0 million to 14.0 million is the new norm;
– Housing unlikely to return quickly to 2 million starts; New norm may be 1.3 to 1.6 million over
the next few years with cautious funding keeping starts below 1 million at least through 2011.
– Truck market likely to return to more normal levels of demand as early as 2011 e.g. class 8
trucks in the 175,000 to 225,000 range. Prior level peaks of over 300,000 unlikely until at least
the next emission cycle;
– Construction and mining, engines and turbines, railcars and other heavy equipment face a slow
recovery through 2012 to levels likely below 2006 to 2008
– Steel production follows heavy equipment and infrastructure spending with slow recovery
through 2012
Electrical markets probably resume growth post 2010 driven by improving capital spending trends
and the initial recovery of both residential and non-residential markets.
Energy/Alternative Energy markets await resolution of Government policies and priorities to resume
growth.
Farm equipment end market demand growth dependent on global economic growth, global demand
and weather. Growth likely in 2011 as recent global weather issues in the Northern Hemisphere have
offset the risks associated with the potential of large global crops depressing commodity prices.
Farm Equipment
GLOBAL WEATHER PROBLEMS REDUCE DOWNSIDE RISKS
26
THROUGH JUNE 2010, FARM COMMODITY PRICES
WERE SOFTENING
SPRING DATA SUGGESTED LARGE CROPS BUT
RECENT WEATHER MAY PUSH PRICES HIGHER
WHEAT
09/10A
10/11E
ACRES PLANTED
(MILLIONS)
YIELD (BU/ACRE)
PRODUCTION
(MILLION BU)
END STOCKS
(CARRYOVER)
PRICE ($/BU)
CORN
09/10A
10/11E
SOYBEANS
09/10A
10/11E
59.1
44.4
53.8
43.3
86.5
164.7
88.8
163.5
77.5
44
78.1
42.9
2,216
2,043
13,110
13,370
3,359
3,310
190
$9.50
365
$8.00-$9.50
950
$4.90
997
1,738
1,818
$4.10-$5.10 $3.50-$3.70 $3.20-$3.80
Source: USDA WASDE May 2010
28
FARM CASH RECEIPTS ARE
STILL NEAR RECORD LEVELS
Source: DEERE & CO
ATYPICAL JULY/AUGUST 2010 WEATHER CHANGES
OUTLOOK FOR COMMODITY PRICES
•
•
•
•
Weather concerns about current harvest in some key Northern Hemisphere regions have driven recent
global Ag commodity price significantly higher
Global wheat and coarse grain production according to the International Grain Council (IGC) has
been reduced by 23 million tons from a previous near-record 1,782 million to 1,753 million.
– Grain crops have been significantly affected by the adverse July weather in parts of the Black
Sea region, the EU and Canada
– The impact has been mostly in the northern hemisphere wheat and barley crops in which
projections have been lowered by 13 million and 7 million tons respectively.
Reduced grain crop prospects have also reduced consumption forecasts, mainly feed, resulting in a
reduced projection for 2010/2011 global consumption to increase 0.8% to 1,774 million tons. (prior
forecast for 2010/11 was 1,781 million tons, up 1.1% from 1,761 million in 2009/10))
With global crop forecasts reduced more than consumption, 2010/2011 world carryover stocks for
grain are now projected by the IGC to be 18 million tons lower to 369 million tons. This is 21 million
tons below the 2009/2010 carryover of 390 million, but FLAT with the 2008/09 carryover of 369
million tons.
• Global supplies are viewed by the IGC and most Ag economists to be ample.
2010 GLOBAL CROP OUTLOOK AFFECTED BY
ATYPICAL WEATHER
WORLD ESTIMATES
(in Million tons)
06/07
07/08
08/09
09/10E
10/11E
10/11E
(6/24/2010) (7/29/2010)
WHEAT
PRODUCTION
TRADE
CONSUMPTION
CARRYOVER
Y/Y Change
598
111
610
124
(13)
609
110
613
121
(3)
686
136
639
168
47
677
124
648
197
29
664
120
658
201
651
120
655
192
(5)
CORN
PRODUCTION
TRADE
CONSUMPTION
CARRYOVER
Y/Y Change
710
87
725
117
(16)
795
101
775
136
19
796
84
779
153
17
805
84
817
140
(13)
824
88
830
137
823
88
830
134
(6)
TOTAL GRAINS
PRODUCTION
TRADE
CONSUMPTION
CARRYOVER
Y/Y Change
1588
222
1629
281
(41)
1697
239
1685
293
12
1798
249
1722
369
76
1782
235
1761
390
21
1776
234
1781
387
1753
234
1774
369
(21)
COMMODITY PRICES JUMP ON WEATHER FEARS
Wheat Prices Soar on Weather Fear in
Northern Hemisphere…
…Corn Prices follow….
…As do Soybean Prices.
USDA CROP OUTLOOK TIGHTENING
Crop
Wheat Carryover
Price
Corn Carryover
Price
Soybean Carryover
Price
May 2010
July 2010
Sept 2010
Oct 2010
997
1093
902
853
$4.95 - $5.65
$5.20 - $5.80
1,116
902
$4.00 - $4.80
$4.60 - $5.40
350
265
$9.15-$10.65
$10.00 $11.50
$4.10 - $5.10 $4.20 - $5.00
1,818
1,373
$3.20 - $3.80 $3.45 - $4.05
365
360
$8.00 - $9.50 $8.10 - $9.60
33
Eli Lustgarten
D. Mark Douglass
FARM EQUIPMENT OULOOK FOR 2010-2011
IS IMPROVING
2010 Outlook Modestly Improving
Tractors
Growth
Combines
Growth
Worldwide
0% to +5%
Worldwide
(0 to 5%)
North
America
0% to +10%
North
America
<40HP
0% to +5%
0% to 5%
40 to 100 HP
(0% to 5%)
100 HP+
+5% to 10%
Western
Europe
(10% to 25%) Western
Europe
(25% to 30%)
Latin America
+20% to 25% Latin America
+25% to 30%
ROW
(0 to 5%)
ROW
(10 to 15%)
2011 Outlook Now for Moderately Higher Equipment Sales – Up 5% to 15% or More
Globally
ETHANOL MANDATE MAY BE HIGHER THAN
MARKET CONDITIONS CAN SUPPORT
•
Renewable fuels mandates per EISA 2007—2011 CORN STOCK TO USE
RATIO PROJECTED AT 6.7%--2ND LOWEST ON RECORD
Year
Renewable
Biofuel
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
9
10.5
12
12.6
13.2
13.8
14.4
15
15
15
15
15
15
15
15
Source: EISA 2007
Advanced
Biofuel
0.6
0.95
1.35
2
2.75
3.75
5.5
7.25
9
11
13
15
18
21
Cellulosic
Biofuel
0.1
0.25
0.5
1
1.75
3
4.25
5.5
7
8.5
10.5
13.5
16
Biomassbased Diesel
0.5
0.65
0.8
1
Undifferentiated
Advanced
Biofuel
0.1
0.2
0.3
0.5
1.75
2
2.5
3
3.5
4
4.5
4.5
4.5
5
Total RFS
9
11.1
12.95
13.95
15.2
16.55
18.15
20.5
22.25
24
26
28
30
33
36
Power Generation
STILL IN DESPERATE NEED OF AN ENERGY POLICY
36
AFTER 2 YEARS OF USAGE DECLINE..
37
RESERVE MARGINS CONTINUE TO IMPROVE…
38
PLANNED CAPACITY ADDITIONS HAVE SLOWED
FUEL (in
MW)
2009E
2010E
2011E
2012E
2013E
Coal
4,765
5,932
2,837
7,156
630
Natural Gas
11,388
9,950
8,804
10,208
5,191
Nuclear
Wind
1,270
9,459
2,259
1,591
Petroleum
748
568
200
Solar
145
468
375
950
Other
594
364
184
1,132
457
27,099
19,841
13,991
20,741
6,294
TOTAL
39
25
16
WIND FACES UNCERTAIN GROWTH IN 2010
WITH FAVORABLE STATE AND FEDERAL POLICIES
US wind sector on path for 165GW of installed capacity by 2025
Total wind capacity would be about 200 GW representing about 5% of US
energy sources.
NEAR-TERM POLICIES CREATE UNCERTAINTY
Problems include Transmission congestion and fall electrical demand
Need Coordinated NATIONAL Transmission policies and National Renewable
Energy Policy/Federal Energy Policy
BIG CAPACITY ADDITION DROP LIKELY IN 2010 FROM 9,922MW IN 2009
Only 500MW installed in 1Q10
Only 700MW installed in 2Q10
CLEAN ENERGY, JOBS, AND OIL COMPANY
ACCOUNTABILITY ACT
• NEW SENATE BILL INTRODUCED AT END OF JULY
• NO CAP ON CARBON EMISSIONS FOR ELECTRIC POWER
SECTOR
• NO RENEWABLE ENERGY STANDARD (RES) WITH 15% TARGET
BY 2021
• China wind/solar low carbon technology investment is currently
$11.9B compared to $4.9B in the U.S. and $4.5B in Europe
• 28 states and District of Columbia have RES targets that are
higher than 15% TARGET missing from the Senate Bill
Automotive
THE UGLINESS IS OVER; FOR NOW ITS JUST UGLY
42
SALES CYCLE IS IN MASSIVE DECLINE
44
SOURCE:DESROSIERS
AUTOMOTIVE CONSULTANTS
45
SOURCE:DESROSIERS
AUTOMOTIVE CONSULTANTS
46
SOURCE:DESROSIERS
AUTOMOTIVE CONSULTANTS
AUTO INDUSTRY FACES SOME DIFFICULT YEARS
OE
Year
NAFTA PRODUCTION (in
millions
2004
15.8
2005
15.75
2006
15.25
REGION
2008
2009E
2010E
DETROIT 3
16.6
11.8
13.3
EUROPE OEM
18.6
15.9
16.9
JAPAN/ KOREA OEM
21.1
17.5
19.9
OTHER (INDIA,CHINA)
10.4
9.6
10.6
54.8
60.7
TOTAL
2007
15
2008
12.6
2009E
8.5
2010E
11.3-11.5
2011E
12-13
GLOBAL OEM PRODUCTION
66.7
European build 2009: 15.9 Million, -25%
2010: 16.9 to 17.5 Million
2011: 17.5 to18.5 Million
Source: CSM
SLOW RECOVERY FOR APPLIANCES
KEY DRIVERS: HOUSING, JOBS AND
CONSUMER BEHAVIOR
48
KEY DRIVERS OF APPLIANCE SALES
• New housing completions
• Existing home sales
• Unemployment rate
• Growth in replacement demand
• Consumer spending and income
49
STATE OF THE APPLIANCE INDUSTRY 2009
• CORE APPLIANCES — 36,848,000 TOTAL UNITS
– REFRIGERATION 28.3%
– LAUNDRY
39.9%
COOKING
17.1%
DISHWASHERS 14.7%
• DOLLAR VALUES
– REFRIGERATION $8.2B
• SIDE BY SIDE
$2.5B; TOP FREEZER $2.6B
• BOTTOM FREEZER $2.4B; FREEZER
$0.7B
– LAUNDRY
• WASHERS
$8.1B
$4.6B; DRYERS
$3.5B
– COOKING
$4.9B
– DISHWASHERS $2.4B
50
Source: AHAM;
The Stevenson Co.
AHAM DATA STILL HISTORICALLY WEAK
51
RECESSIONS IMPACT APPLIANCE DEMAND
• Core Appliance Sales Decline in Recessions
– 1970
-2.8%
– 1974-75 -28.5%
– 1979-82 -25.5%
1988-91 -7.2%
2000-01 -0.5%
2006-09 -22.2%
• Appliance Sales Improving Since Early 2009
– Sales surged in November 2009 (Black Friday) and
– April 2010 (Cash for Appliances)
• 2010 Sales are UP 6.2% YTD
– Refrigerators 15.4% led by side by side up 13.3% and bottom
freezer up 45.6%
– Cooking up 6%
– Laundry up 1.8% led by Front Loaders up 4.3%
– Dishwashers up 7.4%
52
Source: AHAM; The
Stevenson Company
MODEST GAINS FOR APPLIANCES IN 2010-11
• Key Near-Term Factors
– Housing Outlook—
• 2009-550,000;
• 2010E 600,000-650,000;
• 2011E 850,000 to 900,000 May be a Stretch; 750,000-800,000
more likely
– Jobs---Slow Recovery
– Consumer Behavior
• New Construction used to be 20% of Market; Now 8%
• Outlook is for Modest Gains
– 2009A
– -8.2%
2010E
+3% to 5%
53
2011E
+3% to +8%
BRAND SHARES ARE CHANGING
•
•
•
•
•
•
•
•
•
•
WHIRLPOOL LARGEST MARKET SHARE
Whirlpool
34%
LG
7% Other 7%
Kenmore
19%
Samsung
4%
GE
18%
Electrolux 11%
THE FOREIGNERS ARE COMING
1H2010
STRONGEST PRODUCT
LG
7.7%
Front Load
24.7%
Samsung 4.8%
Bottom Freezer 21.8%
Bosch
1.9%
Dishwasher
7.2%
Haier
0.5%
Compact Refrig 5.9%
54
Source: AHAM;
The Stevenson Company
TECHNOLOGY AND DESIGN MATTER
• Stainless Steel Keeps Growing
–
–
–
–
–
YTD 2010
2009
2008
2007
2006
29.5%
28.0%
27.0%
26.8%
24.5%
2005
2004
2003
2002
2001
21.8%
17.3%
13.4%
8.5%
5.2%
• AS Does Energy Star Sales
–
–
–
–
YTD 2010
2009
2008
2007
76.3%
54.5%
45.1%
40.2%
55
Source: AHAM; The Stevenson
Company
ON HIGHWAY VEHICLES:
Will the Slow Recovery Gain Steam in 2011?
US TRUCK FREIGHT MOVEMENT
IN MODERATE RECOVERY
2010-PRE-BUY WAS ONLY FOR ENGINES
 Companies BUY TRUCKS TO MOVE FREIGHT
 Pre-buy of trucks unnecessary – You don’t move freight in a recession!
 Weak economy kept freight demand soft for most of the year;
 Current equipment in good condition though average fleet age was creeping up
at 6.2 years. Age doesn’t matter if you are not moving freight!
 Plenty of capacity available; USED TRUCK PRICES VERY WEAK
 Used capacity came to market as companies fail; failure rate was 1,000
companies per quarter freeing 40,000 trucks
 Potentially more favorable economics for 2010 engines compared to 2007 if
increase in fuel economy is correct
 2010 Truck Prices are up substantially
 Volvo $9,600
 Daimler-Benz w/ Cummins Engines up $6,700 to $7,300; with Detroit Diesel
Big Bore $9,000
 Navistar $6000 (MaxxForce 7,DT, 9 10) to $8,000 (MaxxForce 11,13)
Class 8 Heavy-Duty Diesel Truck Demand:
A Return To Normal Levels?
2007
212,000
2008
205,000
2009a
118,400
2010E
140,000-150,000 (We are at 145,000)
2011E
175,000-225,000 (We are at 195,000)
Source: ACT/FTR
Economic Environment for Trucking Improving
 Domestic economic environment improving with
rising industrial production
 Total freight ton-miles declined about 2.9% in 2008
and near 8% for all of 2009;
 Look for growth of at least 2.5% to 3% in 2010 and
about 4% or more in 2011
 Truck ton-miles down about 5.7% in 2008 and about
9.5% in 2009;
 Likely to rise near 4% in 2010 and 5% to 6% in 2011.
60
Roadmap to Equipment Demand Recovery
 Growth in freight tonnage
increases for Used trucks/New trucks with 2009
engines which cost less than new 2010 engines
 Truck Production in 1Q10 remained strong reflecting
inventory Turned positive on a YOY basis in 1H10
Existing stock will handle freight upturn
Demand of pre-2010 engines (2010Trucks, 2009 engines)
 Transition from old engines to 2010 engines will likely
begin late 2Q10 AT THE EARLIEST
 Economic recovery, increased truck capacity utilization,
and improving trucker bottom-line will translate into
replacement of aging equipment in 2011-2012.
61
TRUCK SECTOR SHOULD LEAD INDUSTRIAL
MARKET GROWTH IN 2011
• Why do you a buy a truck? The answer, to “Move Freight “(Class 8) or
for the “Delivery of goods/services and support a business” (Class 4 to
7). Economic growth will drive an increase in truck demand
• Truck tonnage continues to grow; Excess capacity still exists in the
industry; driver shortage is a key to the level of future demand
• Large fleets are now making money and have access to capital;
medium/small fleets are still having a hard time getting capital
• Recent surge in orders is for near-term production; 3Q2010 has about
8,800 unfilled slots on a production schedule of about 39,000 and
4Q2010 has 24,900 unfilled slots on a 39,600 production schedule.
Monthly orders of only 8,400 needed to fill the remaining slots in
2010. BUT, most of early 2011 production schedule needs to be filled
• WATCH October and November orders for Key to 2011
• Economic slowdown may not sustain future strong order activity
favoring perhaps a more conservative increase next year
62
Eli Lustgarten
D. Mark Douglass
Richard Marshall
NAFTA Truck Production Forecast
Year
Class 8
Medium Truck
Trailers
2006
376,000
274,000
303,000
2007
212,000
206,000
229,000
2008
205,000
157,000
155,000
2009
118,400
97,700
78,000
2010E
145,000
110,000
110,000
2011E
195,000
170,000
150,000
2012E
250,000
205,000
210,000
• DEFENSE OUTLOOK IS AS UNCERTAIN AS IT
HAS EVER BEEN IN HISTORY!
63
Non-Truck Diesel Engine Sales May Benefit From
a Modest Pre-Buy in 2010
• Off the road and other segments face new emissions
mandates
– Interim Tier 4 (2011) which is similar to Truck 2007
when prices rose $4,000 to $6,000• Phased in requirements starting with over 174HP in 2011;
• Credits will be used for some models
– Final Tier 4 (2014) which is similar to Truck 2010
when prices rose $8,000 to $10,000
– Europe (Euro 4, Euro 5 and Euro 6) and Emerging
Markets have similar standards going into place
• CAT has warned industry to expect up to $14,000 in
higher prices between 2011 and 2014 which will be phased
in over the period
64
Fluid Power:
DIFFICULT 2009; THE BULL-WHIP DRIVES 2010
AUGUST 2010 FLUID POWER SURVEY: BULLWHIP ENTERING LATER STAGE
• YEAR OVER YEAR DEMAND STABILIZING AT
HIGH LEVELS
• YoY demand growth now flat for a majority of contacts
• Certain industries are better including agriculture, food
processing, mining and manufacturing
• MRO remains steady; project activity is mixed
66
Eli Lustgarten
D. Mark Douglass
Richard Marshall
AUGUST 2010 FLUID POWER SURVEY: YOY
DEMAND STABILIZING AT HIGH LEVELS
67
BULL-WHIP ENTERING LATER STAGE
• SEQUENTIAL DEMAND FALLS; LARGELY FLAT
• Contacts report that they were generally busier during the
late spring and earlier summer months and have now
experienced somewhat of a decline.
• Agriculture according to the majority of contacts is
responsible for a large part of their demand.
• Construction and mining equipment demand seems to have
slowed a bit it is still showing some strength
• Demand from the food processing industry is still doing
well; contacts expect more demand from harvest season
• PRICING REMAINS STRONGWITH YEAR OVER
YEAR GAINS OF ABOUT 3% TO 5%
68
SEQUENTIAL DEMAND FALLS, NOW
LARGELY FLAT
69
SALES OUTLOOK NEUTRAL
• DEMAND SHOULD STAY AT OR NEAR CURRENT
LEVELS
• The outlook is largely neutral, in part due to economic and
political uncertainty.
• Contacts are also not seeing such robust demand this
quarter.
• Certain industries do seem to be seeing stronger demand
such as agriculture and excavator equipment.
• However, a source at a cold drawer in the Great Lakes
region: "I just got the fourth-quarter forecast for Caterpillar
(Inc.). Their forecast is coming way down. They're looking
to go a little quiet. Some customers are full-speed ahead,"
although some never got out of the recession (AMM 9/10).
70
SALES OUTLOOK: DEMAND SHOULD STAY
AT OR NEAR CURRENT LEVELS
71
Fluid Power End Use Breakdown of Some Key Sectors (percent)
Mobile
Farm machinery
Lawn & garden
Construction
Mining
Mobile/aftermarket
Other
Total--Mobile
Industrial
Machine tools
Paper machinery
Food
Chemical
Plastics
Packaging
Industrial aftermarket
Other
Total--Industrial
2007E
2008E
2009E
2010E
2011E
8%
-10%
-16%
5%
0%
3%
5%
-5%
12%
10%
-4%
10%
-20%
-22%
-65%
-40%
-45%
-25%
15%
7%
45%
50%
25%
20%
8%
7%
15%
12%
10%
20%
9%
7%
7%
12%
-5%
0%
7%
6%
-2%
-10%
3%
5%
-10%
0%
5%
3%
-40%
-20%
-10%
-20%
-20%
-20%
-25%
-20%
60%
10%
10%
15%
10%
10%
30%
25%
15%
7%
7%
15%
10%
10%
15%
10%
-0.8%
6.0%
-36%
30.1%
13%
Total
Total Change in Fluid Power Market
72
CONSTRUCTION EQUIPMENT:
RECOVERY IS ON THE HORIZON
2009 CONSTRUCTION DEMAND
WAS VERY WEAK
CONSTRUCTION EQUIPMENT
LIGHT EQUIPMENT WORLDWIDE
%CHANGE 2009/08E
-45%
o North America
-49%
o Western Europe
-49%
o Latin America
-54%
o Rest of World
-36%
HEAVY EQUIPMENT WORLDWIDE
-30%
o North America
-47%
o Western America
-56%
o Latin America
-56%
o Rest of World
-14%
Source: CNH; Caterpillar, Deere, Terex, LBR Forecasts
1H10 CONSTRUCTION EQUIPMENT SALES WERE
DRIVEN FROM DEMAND ABROAD
Light Equipment
1H10
1H10 Detail
Light
Heavy
Worldwide
+33%
Brazil
106%
162%
North America
+7%
Argentina
136%
120%
Western Europe
+10%
Australia/NZ
137%
98%
Latin America
+98%
CIS
264%
207%
ROW
+69%
China
95%
102%
Turkey
244%
393%
South Africa
142%
44%
Heavy Equipment
1H10
North America
-1%
Western Europe
+1%
Latin America
+126%
ROW
+97%
Source: CNH, CAT, DE, LBR
75
OUTLOOK FOR 2H10 AND 2011 IS IMPROVING
•
•
•
•
•
•
The environment for construction activity for the rest of 2010 and 2011 will improve over 2009, but be less
than robust
– Key is financing availability; institutions will likely to be reluctant to rapidly expand availability
– Defining government rules for stimulus programs will determine the success of getting stimulus
dollars into this sector
Housing will likely show improvement over the next two years rising from about 550,00 starts in 2009 to
perhaps 600,000 to 650,000 plus in 2010 and perhaps 750,000-800,000 or more (WE HOPE) in 2011.
– The NAHB recent forecast of housing starts for 2010 of 656,000 (recently lowered to 632,000 and
now 610,000), up from 554,000 in 2009 is no longer viewed as extremely conservative.
– NAHB 2011 forecast of 871,000 (was 906,000) for 2011 is less certain today. Perhaps 750,000 to
800,000 is more likely.
Non- residential construction is expected to fall 10 % to 20% in 2010 and perhaps stabilize in 2011 before
resuming growth sometime that year.
Infrastructure spending will likely be relatively flat into 2011 or at least until a new Highway Bill is passed.
History suggests that growth will resume about a year after the new Highway Bill has been funded
– New short-term $50B infrastructure proposal on horizon to stimulate economy and jobs growth.
For 2011 we expect at least a mid-single digit gain in construction spending led by residential spending and
a modest turnaround in the non-residential sector (up 3% to 10%).
By 2012, new legislation should relieve the bottlenecks in infrastructure and other public works markets
leading to vastly improve activity.
76
EMERGING MARKETS LEAD 2010 CONSTRUCTION
EQUIPMENT RECOVERY
Light Equipment
% Change
Worldwide
20% to 25%
North America
5% to 10%
Western Europe
0% to 5%
Latin America
60% to 70%
ROW
30% to 35%
Heavy Equipment
% Change
Worldwide
30% to 35%
North America
0% to 5%
Western Europe
-5% to 0%
Latin America
60% to 65%
ROW
40% to 45%
Source: CNH, CAT, DE, LBR
77
DOMESTIC CONTRUCTION EQUIPMENT DEMAND DRIVEN
BY EXPORTS AND END OF INVENTORY LIQUIDATION
•
•
•
•
DOMESTIC Construction equipment end market demand in F2010 looks up modestly
in F2010.
Production will increase 20% to 30% or more due to the end of inventory liquidation
and exports which will allow OEM’s to produce at or near retail demand.
– The domestic upturn will initially favor smaller to medium equipment (more
units, less dollars) which has been declining for the past three to four years.
– Equipment for rental companies will likely see an upturn in demand as
contractors may favor rental rather than outright purchases
– Heavy equipment demand will likely be soft in F2010;
– Global Mining equipment demand has fully recovered because of demand from
emerging markets.
F2011 will likely be a better year for all classes of machines with sales and production
rising at least double-digits (10% to 15%) assuming sustained growth in the global
economy.
Global mining equipment demand up 10% to 20% in 2011 and perhaps an additional
10% to 15% in 2012.
78
2012: REPLACEMENT MARKET KEY TO NA DEMAND
• Current Sales in NA Well Below Replacement Levels even at
current level of construction activity
• Classic Recovery Signs
– Used Equipment Prices are Rising
– Rental Fleets Expanding
• (CAT’s rental fleets are down 40% and aging)
– Aftermarket demand improving
• With More Normal Industry Activity, Construction Equipment
demand should rise materially
79
Machine Tools:
SURPRISINGLY STRONG RECOVERY IN 2010
MACHINE TOOLS: A SURPRISINGLY STRONG
REBOUND
 STRONG UPTURN IN 2010 AFTER 58% DECLINE LAST
YEAR WITH METALCUTTING DOWN 61%
 UPTURN DRIVEN BY BIG STEP UP IN FOREIGN DIRECT
INVESTMENT, AND A DOUBLING OF SPENDING BY
AEROSPACE AND CONSTRUCTION EQUIPMENT COMPANIES
REBOUNDING OFF DEEP TROUGH, BUT
ONLY APPROACHING 2005-LEVELS
82
MACHINE TOOLS: A SURPRISINGLY STRONG
REBOUND
• Machine tool markets should still see reasonably strong
growth into 2011 as they climb out of deep hole but still
may not even be at 2006 levels until 2012
2001
2002
2003
2004
Metalcutting
$2,369
$1,906
$1,737
$2,775
% Ch
-33%
-20%
-9%
Metalforming
$347
$345
% Ch
-45%
Total
% Ch
2005
2006
2007
2008
2009E
2010E
2011E
$2,935
$3,703
$3,982
$3,897
$1510
2575
$3,220
60%
6%
26%
7.5%
-2.1%
-61%
70.5%
25%
$295
$366
$397
$395
$441
$501
$236
$170
$205
0.5%
-15%
24%
8%
-0.5%
12%
13.5%
-53%
-28.0%
21%
$2,716
$2,251
$2032
$3,143
$3,332
$4,098
$4,423
$4,398
$1,746
$2.745
$3,425
-35%
-17%
-10%
55%
6%
23%
8%
-0.5%
-60%
57%
25%
Industrial Markets Outlook:
The Search for the New Normal
Speech to the AMT GLOBAL FORECASTING
AND MARKETING CONFERENCE
Eli S. Lustgarten
Senior Vice-President, Longbow Securities
OCTOBER 20 , 2010
84