Factory Equipment Deep U-shaped trend expected for machine tool orders, but declines likely to stop

The outlook for the Japan machine tool order cycle has shifted to a deep U-shape. As a result, a full recovery in orders will likely move to 2021, but it is also increasingly likely that the next cycle will continue through 2022.

11 Jun 2020

Machine tool orders and yoy growth rate (Qtr)

Source: JMTBA, UBS estimates

This column & line graph illustrates machine tool orders and growth rate from 2000 to the present, with estimates for 2021.

U-shaped trend expected for machine tool orders

Machine tool orders were ¥51.3bn (-53% yoy) in May 2020. Plans for new models in the auto sector are being curtailed or postponed due to COVID-19 effects and order activity for new projects has stagnated. Amid this, the outlook for the machine tool order cycle has now shifted from the previously estimated L-shaped trend to a deep U-shaped pattern. As a result, a full recovery in orders will likely move to 2021, but it is also increasingly likely that the next cycle will continue through 2022. However, headwinds are increasing overall in areas where investment is for volume production and we are gaining increasing confidence in the view that the peak for machine tool orders in the next cycle will be lower than the previous cycle.

We think machine tool orders have stopped declining

The outlook for machine tool orders is difficult to forecast due to US-China trade friction and the COVID-19 pandemic. However, we estimate that since April 2020, orders not including investment for growth have been below ¥60bn. Various governments are taking extensive measures to supply funds and unlike 2009, it is also difficult to foresee orders being cancelled. Furthermore, automotive capex in 2020 may decline only modestly. Near term, attention will likely focus on whether the Jul-Sep order outlook DI that Japan Machine Tool Builders' Association (JMTBA) plans to release on 23 June will show a qoq increase.

Order outlook for 2020E and 2021E lowered 16% and 13%

We forecast machine tool orders of ¥780bn in 2020 and ¥1,080bn in 2021. With drivers of demand uncertain, the capex cycle is shortening and machine tool customers are likely to continue to constrain order scale. We think it is too soon to discuss the peak in the next cycle, but there is no change to our structural view that it will be below the previous cycle in 2018. Another point of caution is that growth may be relatively difficult for high-end machinery for the China market.

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