Machinery sales data: What do they mean?

This is one of a series of reports that introduce the readers to the wealth of economic data available from the U.S. government and many industry associations for practical economic planning in plastics processing. Each processing business is different, but one can use these general guidelines and customize them for in-house business planning. These explanations will also be posted on our website for easy reference in the future.

The sale of machinery to plastics processors should be a very useful economic gauge of business performance. We are talking here about injection machines, extruders, blowmolding equipment, auxiliaries, and the like.

But unlike other major markets, such as metal-working, plastics processors and their suppliers face a serious dearth of data. They are only available in very limited form in comparison to other markets, such as machine tools, which reports on a monthly basis and in great detail just how many machine tools have been ordered, sold, or even shipped, broken down into different types.

What can you do?

So what data are available to you?

The Society of the Plastics Industry''s Committee on Equipment Statistics issues a quarterly report on machinery shipments. There is a charge for the report. You can learn more about this shipments report by visiting SPI online at www.socplas.org. Some of the major machinery companies are publicly held, and thefore on their websites you can access quarterly reports wherein these companies detail orders, shipments, and backlog. One such machinery manufacturer in the United States is Cincinnati Milacron: www.milacron.com. Private consulting groups also generate specific reports on machinery sales data for select clients to supplement the lack of publicly available data. Some of this report, for example, is based on information that The Repton Group LLC collects for select clients. Once you have data, what do they mean? Machinery sales and orders are a leading indicator. What does that mean? As capacity utilization increases in plastics processing plants, machinery sales are likely to increase also. Changes in machinery sales indicate the following: Capacity utilization has reached around 81% to 82%-traditionally the level where manufacturers start considering expanding. A drop in capacity utilization will almost always lead to a decline in machinery sales. To track capacity utilization in a wide range of end markets, go to the Federal Reserve''s website at http://federalreserve.gov and select "Economic Research and Data." Increased orders for machines as well as actual machinery shipments do provide you with an indication that plastics processors are increasing capital spending and are more confident of the future. For historical data on capital spending see http://www.commerce.gov. Some of the increase in machinery sales is quite independent from capacity utilization. Processors increasingly are on a planned machine-replacement cycle. Additionally the pressure of low-cost imports has motivated processors in Canada, Mexico, and the United States to invest in ever more modern and more fully-automated production systems. The view of 2004 To provide you with some practical advice on how machinery data can be utilized, here is an analysis of the economic meaning of machinery data known for 2004. When describing machinery orders for 2004, most machinery makers view it as a turn-around year. The question on which way it''s going to turn still remains on the table as we enter the fourth quarter of 2004. Makers of extruders and auxiliaries generally agree that it has been a positive year, consistently heading in a direction of growth. Manufacturers of injection molding and blow molding equipment haven''t seen that kind of growth and are still looking for orders that at least so far, haven''t arrived. Were buyers waiting for Plastics USA or K 2004? Probably not, although these shows may have provided a bit of a boost and created some impetus for 2005. The U.S. economy continued to recover during 2004, although the plastics industry didn''t participate in that recovery as much as some other industries did. Manufacturers of blow molding equipment and some types of extrusion equipment are quick to tell you that they have been adversely affected by consolidation of the packaging industry. For instance, one manufacturer of sheet extrusion equipment cites the merger of four companies in the last year that has resulted in the now two-merged companies controlling over 50% of the PET sheet market. Mergers generally lead to consolidation, and consolidation leads to excess equipment in the market. Another important factor in 2004 was rapidly increasing resin costs that many processors found difficult to pass through to their customers. While OEMs tell us that there remains plenty of capital to finance new machinery, the future with regards to consistent growth remains murky. Many machinery buyers are postponing new equipment orders for as long as they can. This is evident in a forecast prepared by Mountaintop Economics & Research for the Bureau of Economic Analysis for the Society of the Plastics Industry (SPI). While capital spending on industrial machinery was expected to increase, and we believe it did increase in each quarter so far during 2004, it is still 12% behind capital spending on machinery in January 2001. Finally, it''s hard to talk about the ills of the domestic plastics industry without talking about China. It has become the number one country in the world in which to sell plastics processing machinery, and American firms may have had a disadvantage there as Asian and even European machinery makers made an earlier entry into China. U.S. expansion in plastics continues to suffer at the expense of China, although the Sino parade appears to have slowed somewhat in 2004. That situation could get better as there are reports in recent days of increased pressure on China''s government from the International Monetary Fund to float the yuan. A free-floating yuan is expected to boost U.S. exports, particularly with regard to industrial machinery. The total value of machinery shipments for injection molding, blow molding extruders, and auxiliary equipment for the first three quarters of 2004 are estimated to total about $858.8 million. That''s slightly lower than the $865.1 million the industry shipped in the first three quarters of last year. SPI reports that first quarter 2004 shipment figures were 10% lower than fourth quarter 2003 (subsequent quarterly figures were not available from SPI at this writing) and we believe the second quarter may have been even lower still, with a rebound in the third quarter that will likely extend through the rest of the year. Our forecast for total 2004 machinery sales is just over $1 billion. Injection molding machine makers weathered through another difficult year but they are quick to use that term "turnaround." Riding high on shipments of 865 units in quarter four of 2003, the wind fell out of sales (no pun intended) during the first quarter of 2004 when total shipments fell to 846 units. A senior executive with one injection molding machine maker told us that his company has seen the greatest amount of growth in large tonnage machines in the over 750-ton range and in mid-size machines. He credits the automotive industry, appliance, packaging, and housewares industries for that growth. Surprisingly, if you look at machinery import figures reported by the U.S. Dept. of Commerce, imports of large tonnage machines were in a minus mode from January until August. This same executive told us that the small machine market was steady but his firm had not seen much growth this year in the small machine segment. With regards to electrics, his comment was, "the market for electric machines continues to be chugging along." You decide what that means. Injection molding machine makers did make progress in getting their machine prices up this year, for the first time in two, perhaps three years. We estimate the total value of injection molding machine shipments for 2004 will reach $703 million, certainly not a record, but an improvement over 2003. Manufacturers of blow molding machines may be the most distressed this year because they have seen less of a recessionary impact than makers of other plastics processing equipment in the past three years. The packaging market was virtually immune to the economic downturn and when coupled with technology improvements in blow molding, the sector marched along. That is, until first quarter of 2004 when shipments, according to SPI figures, sank from 34 units in fourth quarter 2003, to 18 units in first quarter of 2004, a 48% decline and the lowest number of blow molding machines shipped in a quarter in years. The value of shipments also dropped substantially, from $30.7 million in the fourth quarter of 2003 to $13.6 million in the first quarter of 2004. In the first quarter of 2003, blow molding machine makers shipped 38 units at a value of $21.7 million. We estimate that shipments through the third quarter rebounded with economic improvement and reached 113 units for a total value of $39.4 million. We anticipate further improvement in the fourth quarter of 2004 with the total number of units shipped reaching 158 and a value of about $54.3 million. Extrusion equipment manufacturers seem to have seen the most out of the economic recovery. Maybe that''s because it''s where plastics processing starts-with compounding and pelletizing-and this may be a good omen for the future. Extrusion equipment makers started the year with a similar dip in shipments experienced by injection molding and blowmolding machine makers with a drop from 260 machines shipped in the fourth quarter of 2003 to only 189 machines shipped in quarter one of 2004. Unlike makers of blow molding or injection clamps, extruder manufacturers typically don''t have machines sitting on the shelf. Everything is custom built and an extruder maker judges his or her business on the backlog. Extruder makers we contacted told us their order backlog has climbed to five or six months and this is a comfortable situation. As already mentioned, makers of pipe, profiles, and sheet extruders have seen unprecedented industry consolidation and this has an adverse affect on new orders. On the other hand, resin sales have been excellent this year and makers of twin-screw machines and machines used for compounding have seen their business improve over the last six months. We expect that there have been about 565 units shipped in the first nine months of this year and that by year-end 790 units will ship. Extruder makers may also be the first plastic machinery makers to get their prices up. They point to steel costs, in particular, that have increased by 100% in some cases, requiring stiff price increases for their equipment. The value of extruder shipments should get close to $1 billion by the end of 2004. Auxiliaries started the year with a bang, according to SPI figures, at more than $81 million in the first quarter, topping all quarters in 2003 and setting a trend for a profitable year. It may be the healthiest part of the plastics machinery market, and auxiliary makers point to new technology that adds to productivity and cost savings. We forecast that auxiliary equipment shipments hit a value of $243.5 million in the first three quarters of 2004 and may finish the year at a value of $340.6 million. Agostino von Hassell [email protected], and Mark Bella [email protected], of the Repton Group LLC (New York).