North American Forging Shipment Forecast 2014-2018 (Using FIA bookings information through December 2013)
Percent Change Year Ago Best leading indicator combination for impression die bookings used to project 2014 Consumer sentiment combined with the custom blended scrap metal prices (68% ferrous, 32% nonferrous) Consumer sentiment, 9 month lead to bookings, Consumer sentiment sensitivity, 0.58 Custom blended scrap price, 6 month lead to bookings Custom blended scrap price, sensitivity 0.48 Combined equation explains 80% of the bookings movement Impression Die Bookings Forecast Impression Die Bookings 1 st half 2014, up 5.0% y/y 2 nd half 2014, up 6.5% y/y Using Consumer Sentiment 2013Q2-2013Q3, up 7% y/y 80 60 40 20 Impression Die Historical Equation & Forecast Impression Die Bookings Actual 2013Q4-2014Q1, up 8% y/y 0 Using Blended Scrap Prices 2013Q3-2013Q4, up 2% y/y 2014Q1-2014Q2, up 4% y/y -20-40 -60 2
North American open die shipment projections are revised only slightly compared to the October 2013 forecast. A small turnaround during 2014 is still expected. Billion Dollars 3.00 2.50 Open Die Shipments May 2013 August 2013 October 2013 January 2014 2.00 1.50 1.00 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 3
Negative forces behind a forecast revision Spending on capital equipment is still growing, but slowly. IHS expects economic growth to improve in 2014, but still remain below 3.0%. In the near term, most of the energy drilling is for oil. However, over the long term both oil and gas drilling should be remain strong. Investment in the energy sector remains bullish. Slower growth in Asia has stepped up import penetration into the US. Europe is improving, but very slowly. Confusion from Washington is stifling growth.
North American Rolled Rings Tonnage Shipments Tonnage to rebound slightly during 2014, but much stronger growth is anticipated during 2015 and 2016 Thousand Tons Percent Change Year Ago Rolled Rings Sales, Tons 300 Tons (Left) 40 250 Growth Rates (Right) 30 200 150 100 50 0 20 10 0-10 -20-30 5
Forging Industry Bottom Line Bookings: Short-Term Outlook Based on FIA 2013Q4 data the big year-over-year declines for bookings are over. First half 2014 growth to be up only 2-4% from first half 2013. Second half growth to improve 4-7% from a year ago provided equipment production and investment increases at a faster pace. Shipments: Next Year s Outlook The stage has already been set for a turnaround in shipments. Don t look for a strong one, only 3-5%. But one supported by slowly growing business confidence and investment with fasten gains in equipment orders and production. The second half of the year should see larger year over years growth than the first half as manufacturing ramps up toward a faster paced 2014. Higher machinery exports will also drive forging shipments. Shipments: 2015 Outlook Forging shipments have the potential to increase near 10% as equipment end-market production and demand picks up most. A stronger economy and investment in equipment will be a dominate factor. With the tremendous order pipeline aerospace will need to see a double digit increase in output. Airbus will also start production in the US. A turnaround is anticipated in the oil and gas drilling industry, but it will be gradual and over the longer-term.
North American Economic Outlook Economic fundamentals continue to improve
The US economy poised to accelerate in 2014 Consumers will increase discretionary spending in response to solid gains in employment, income, and asset values. Homebuilding will surge until 2016, when it catches up with demand. Business investment will accelerate, led by equipment spending. The January forecast incorporates the Bipartisan Budget Act of 2013, which provides relief from the sequester through fiscal 2015. Interest rates will rise significantly over the next four years as monetary accommodation is withdrawn. The North American energy boom will continue to create jobs, investment, and a competitive advantage in manufacturing. 8
Real GDP growth and the unemployment rate 6 10.0 3 8.8 0 7.6-3 6.4-6 The unemployment rate will hit 6.0% in early 2015 5.2-9 2005 2007 2009 2011 2013 2015 2017 4.0 Real GDP growth (Left scale, annual percent change) Unemployment rate (Right scale, percent) 9
US real GDP and industrial production growth will strengthen in 2014 and 2015 8 (Percent change) 4 0-4 -8-12 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 Real GDP Industrial production 10
Government spending on Social Security and healthcare will rise as the population ages 14 (Percent of GDP) 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Social Security Medicare State & local medical 11
An acceleration in the global economy Global economic growth will strengthen in 2014, thanks to better performances in North America and Western Europe. Western Europe will gradually recover, with northern countries leading and southern countries with heavy debt burdens lagging. Asia (excluding Japan) and sub-saharan Africa will achieve the fastest growth. China s growth has stabilized; real estate markets still pose downside risks. Emerging markets that depend on external finance are vulnerable to the Federal Reserve s withdrawal of extreme monetary accommodation. Geopolitics and policy mistakes are the main sources of risk. 12
Real export and import gains are picking up 20 (Year-over-year percent change, 2009 dollars) 15 10 5 0-5 -10-15 -20 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Real US exports Real US imports 13
The dollar s real exchange value will stay competitive 1.75 (Real trade-weighted dollar index, 2009 = 1.00) 1.50 1.25 1.00 0.75 0.50 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 Major trading partners Other important trading partners 14
Bottom line for the US economy Real GDP growth is projected to pick up in 2014 and 2015, led by strengthening private-sector investment. Homebuilding will rise through 2016 as supply catches up with demand. Consumer spending will be supported by gains in employment, personal income, and household wealth. Net exports will support economic growth after 2015. Interest rates will rise through 2017 as monetary accommodation is withdrawn. Long-term federal fiscal imbalances can be fixed, but the process will be difficult. 15
Economic reforms shape Mexico s outlook Mexico s economy is closely linked to the United States through trade, capital flows, and remittances, and will benefit from a pickup in US growth. Exports and fixed investment will lead Mexico s acceleration in 2014-15. Consumer spending growth will strengthen in response to income gains. The automotive industry is expanding as vehicles assembled in Mexico continue to gain market share in the United States. Constitutional changes will open Mexico s oil and gas industries to substantial foreign investment and eventually reverse the downward trend in oil production. President Peña Nieto s agenda also includes reforming education and labor markets, increasing competition in communications industries, and broadening the tax base. 16
The North American economies are on a moderate growth path The expansion is continuing at a solid pace, although a slowdown in inventory accumulation will restrain real GDP growth in the first half of 2014. Real consumer spending will reach a trend growth rate of about 3%, supported by employment gains and improved household balance sheets. Homebuilding will surge until 2016, when it catches up with demand. Business fixed investment will accelerate, led by equipment spending. Interest rates will rise significantly over the next four years as monetary accommodation is gradually withdrawn. The North American energy boom will continue to create jobs, investment, and a competitive advantage in manufacturing. 17
North American Industry Markets Industry drivers supporting the forging industry should improve slowly though 2014 and accelerate during 2015 and beyond
The Latest News in Manufacturing Manufacturing output grew by 2.5% during 2013. Growth in 2014 is expected to improve to 3.2%. Durable goods orders increased 4.9% during 2013 compared to a year ago. They are expected to continue to increase though 2014. The Institute of Supply Management s purchasing managers index (PMI) was as 51.3 for January (the 50 threshold is an indication a manufacturing contraction or expansion). It has been in the upper 50 range during the second half of 2013. January s softness is mostly viewed as being weather related. Consistent growth in manufacturing output during the fall has set the stage for a faster paced 2014.
The Institute for Supply Management s indexes signal growth in manufacturing and services 65 (Index, over 50 indicates expansion) 60 55 50 45 40 35 30 2000 2002 2004 2006 2008 2010 2012 2014 Manufacturing index Nonmanufacturing index Source: Institute for Supply Management (ISM) 20
US industrial equipment orders were up 18% during 2013 5,000 (Million US dollars) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 2002 2004 2006 2008 2010 2012 Source: Census Bureau 21
For the past three years North American construction machinery production has been driven by the energy market and exports. Look for it to pick-up again in 2015 and beyond 40.0 30.0 20.0 10.0 0.0-10.0-20.0-30.0-40.0 (Percent change) 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 22
Metalworking Machinery Overview Includes: Industrial Mold Mfg Machine Tool Mfg (cutting types) Special Die & Tool, Die Set, Jig & Fixture Mfg Cutting & Machine Tool Accessory Mfg Rolling Mill Machinery The rebound in metalworking industry activity and pent-up demand has allowed capital spending programs to proceed. The motor vehicle industry has become profitable and long-delayed CAPEX programs are moving forward. The Boeing and Airbus ramp-up of commercial air transport production should provide additional support. Growth in metal working should continue, beyond 2014 as many delayed capital projects finally become realized.
Replacement demand will drive power sector investment Electric Utilities Have Adequate Generating Capacity (Percent, electric utility operating rate) 110 100 90 80 70 1998 2000 2002 2004 2006 2008 2010 2012 24
US Utility Capacity Additions (Megawatts) Gas Coal Nuclear Wind Solar Other Total 2012 8906 4320 947 13041 2624 2264 30556 2013 6938 1555 248 1430 3921 2810 15174 2014 4778 600 0 6631 4215 3296 17001 2015 5664 0 1582 7246 3835 3124 19088 2016 11141 482 131 1512 4728 3133 18390 2017 3198 0 483 2939 2001 3920 8985 2018 6453 0 1332 3676 2445 2009 14317
Tight oil and shale gas projects will provide the support US Oil and Natural Gas Production 8.5 7.7 6.9 6.1 5.3 4.5 2005 2008 2011 2014 2017 80 73 66 59 52 45 Oil (MBD) Gas (TCF) 26
US - Auto Market Overview - Signs of a Breakout The auto market has been a stellar performer in a lackluster economy. Pent Up demand is driving the auto recovery; and unless the economy deteriorates, sales will remain strong. Currently we estimate pent up demand at 8 mm units November at 16.3 mm units was the best month since early 2007. Retail not fleet sales continue to drive the market. The weak Yen gives the Japanese OEMs more fire power, but we don t expect an all out price war. Incentives are now being used tactically, transactions prices remain strong. Auto credit quality is excellent and availability is improving. Inventory remains under control. The used car and truck market will remain strong. Cost pressures are easing and industry profits in North America are good. Production will be stronger than sales. Reduced estimates of population growth, especially for Gen Y, limits future auto demand.
US defense aircraft orders down 23% during 2013 8,000 (Million dollars) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 2003 2005 2007 2009 2011 2013 Source: Census Bureau 28
North American Aircraft and Parts Production will need to ramp-up to fill orders 20 15 10 5 0-5 -10-15 -20 (Percent change) 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 29
Bottom line for the major forging markets The off highway and capital equipment markets saw weak growth during 2013, but during the fall of 2013 the stage was set for a significant improvement in the equipment markets this year. But not until 2015 and 2016 will these markets hit full stride. Replacement demand remains the principal driver behind light vehicle sales and higher production, but growing employment and incomes are making the growth sustainable. The outlook for commercial vehicle market is positive as replacement demand continues and freight activity expands. Energy markets offer strong long-term, opportunities, but near-term potential is limited. Non defense aircraft and parts production was a disappointment in 2013. But with its long pipeline of orders, production will need to ramp-up substantially. Despite manufacturers near term caution about Cap Ex, the machinery & equipment view over the next three years still looks very promising. 30
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