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By Larry O’Brien (ARC INSIGHT# 2008-38M SEPTEMBER 18, 2008)
Summary
The slowdown in the global manufacturing economy is evident. Last year, ARC predicted a slowdown in growth for automation and the facts are start-ing to bear that out. It’s important to remember that we at ARC view this as a slowdown, not a contraction or reces-sion in the market, and the overall growth of the automation market re-mains only slightly lower than the all time peaks reached in 2007. Projects are still going ahead as planned, new contracts are being announced just about every day, and there continues to be sustained demand for automation, particularly in the services sector. The supply side of the business is still generating big increases in sales. The hydrocarbons sector remains the primary growth driver for the global automation marketplace. From upstream oil and gas to downstream refining and petrochemical, the investment in the hydrocarbons infrastructure remains strong. Other industries, such as mining and mineral processing, water and wastewater, and life sciences continue to experience robust growth.
U.S. Manufacturing Sector Slows
The latest U.S. indicators show a slowdown in growth for the manufactur-ing economy. The latest Institute for Supply Management (ISM) Manufacturing Report on Business indicated that manufacturing showed a slight decline in August, although the economy grew for its 82nd consecu-tive month. According to the U.S. Census Bureau report on Manufacturers’ Shipments, Inventories and Orders, new orders for manufactured goods in July reflect five consecutive months of increases, but orders for July in-creased by only 1.3 percent over the previous month. The U.S. Federal Reserve Report on Industrial Production and Capacity Utilization, “indus-trial production de-creased 1.1 percent in August and was re-vised down in June and July to show smaller gains of 0.2 percent and 0.1 percent respective-ly.” Factory output was down by one percent in August, which was primarily attributed to the almost 12 percent decline in production of motor vehicles and parts. It is interesting to note that much of the slowdown has been on the discrete side of the business, which we know has been a factor for some time in the North American economy. For example, capacity utilization rates for total industry declined to 78.7 percent, but industries in the crude stage of production continue to have high capacity utilization rates in the 89 percent range.
The Bureau of Labor Statistics of the U.S. Department of Labor recently re-ported revised productivity figures for the second quarter of 2008. According to the revised report, overall manufacturing declined 2.2 per-cent, while durable goods declined 4.5 percent and nondurable goods declined 0.2 percent. Overall output fell by 3.7 percent, which, according to the BLS, is the largest single quarterly decline since Q2 of 1989.
Impact of Hurricane Ike May Give Temporary Boost to Automation Market
While the damage was not anywhere near as severe as it could have been, the Gulf Coast oil industry is feeling the impact of Hurricane Ike. As of Monday, Texas oil refineries have reported that they could be idled for up to nine days, and gas prices have already increased to reflect the constraint on supply. This will only be a short-term issue, however, and the shutdowns will spur a temporary increase in automation related spending as companies scramble to bring these refineries back online. Many automa-tion suppliers have teams of people that assist the end users in brining plants back online in crisis or disaster situations, and this is another example of where the high growth in the services sector of the automation business.
Canada Manufacturing Increases for Fourth Consecutive Month
The Canadian Monthly Survey of Manufacturing from Statistics Canada shows that current dollar manufacturing sales continued to increase in July for the fourth consecutive month, rising by 2.7 percent compared to June. The last time manufacturers report four consecutive months of growth was in the first half of 2002. Seventeen of 21 manufacturing industries reported increases.
The news is not all positive from Canada, however. In terms of capacity utilization, Statistics Canada reports that total industries operated at 78.9 percent of their capacity in the second quarter, down from 79.6 percent in the first quarter, a drop that was again blamed on slowdown in exports for the automotive industry, and to a lesser degree wood products. The manufacturing industry (a subset of total industry) reduced its capacity utilization rate for the fourth straight quarter, operating at 76.7 percent ca-pacity in the second quarter, compared to 77.2 percent in the first quarter.
Western Europe’s Manufacturing: Consumer Durables Slows but Other Industries Are Growing
According to the most recent EUROSTAT Quarterly Panorama of European Business Statistics, the European Union group of 27 countries reached a peak high in manufacturing for all industries in February of 2008. While the consumer durables sector did declined slightly in August 2008 by 3.6 percent, but the energy sector has remained almost unchanged through the first half of 2008. Many of the industry sectors most closely associated with automation continued to do well in the first half of 2008. Growth in production was seen in industries such as fabricated metals, refining, oil and gas, and power generation.
China Shows Mixed Signals, But Overall Environment Remains Positive
While still growing at a healthy rate, industrial output in China is slowing down somewhat. In August, China’s industrial output grew by 12.8 percent compared to July, according to China’s National Bureau of Statistics. In July, output grew by 14.7 percent, and in June it grew 16 percent. The reduced growth has been attributed to reduced consumption of Chinese goods by the West and the sluggish U.S. economy. China’s GDP growth is forecast to come in at around 10.2 percent in the third quarter, roughly the same as the second quarter.
Foreign direct investment in China, however, remains strong. FDI in China increased by 41.6 percent in the first eight months of 2008 com-pared to the same period last year. Foreign direct investment in China for the month of August was $7 billion, which represents a 20 percent increase compared to the same period last year.
India’s Growth Continues Unabated, Infrastructure Slows Somewhat
Growth in the Indian manufacturing sector continues to be strong. According to a recant by the Confederation of Indian Industry (http://www.ciionline.org/), 47 percent of all manufacturing industry sec-tors experienced growth of more than 10 percent in the first quarter. The overall manufacturing sector, however, has slowed in 2008 compared to 2007.
India’s core infrastructural industries are experiencing a slowdown in growth but growth nonetheless. Key infrastructural industries include crude oil, petroleum refinery products, coal, electricity, cement, and fi-nished steel. As a whole, these industries grew by only 4.3 percent from June to July compared to 7.2 percent in the same period in 2007, according to the Indian Commerce Ministry. Crude oil production actually shrank by 3 percent in July compared to growth of 0.9 percent in the same period last year. Total economic growth, which has been at least 9 percent over the past three years, is expected to slow somewhat to 7.7 percent in the fiscal year ending in March 2009. Economic growth in the first half of calendar year 2008 was 7.9 percent.
Latin America
As we wrote in our recent Insight on September 4, Process Automation’s Bright Future in Latin America, the automation and manufacturing environ-ment continues to show good long-term growth prospects. The Statistics Institute of Brazil recently reported that economic growth in the second quarter reached 6.1 percent, slightly better than the projected growth of 5.9 percent. The boom in the commodities market should ensure strong growth overall for the region through next year and beyond.
Last Word
The current economic climate suggests a slowdown in growth for the au-tomation sector. However, there is no sign of recession or of negative growth in the automation market in the foreseeable future. While growth in China and India is slowing, the demand for automation and the sus-tained activity in greenfield projects in these countries and in other parts of Asia and Latin America will continue to provide the growth engine for the global market over the next several years. ARC still sees demand for auto-mation in North America and Europe because of the need to modernize the existing industrial infrastructure and because of sustained growth in the hydrocarbons sector.