Industrial Outlook – What next?

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Industrial Outlook What next?

• LORD Corporation
• Karen Sy-Laughner

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• Global Outlook
• Who Knows?
• Data changes daily
• Government projections differ from that of the
  economists - even for the different countries
• Couple of points
• US Economy is expanding, but at a slower pace
  than earlier this year
• China and India continue to grow strongly, but
  they are highly dependent on the growth of both
  the US and European economies
• Growth in the Americas is primarily in Brazil,
  Mexico, and Argentina. Canadas growth is a bit
  faster than the US but very dependent on US trade
  
• Europe is showing growth in Germany and England,
  but slower growth in England beginning to show.
• Issues with debt and liquidity for Greece,
  Portugal, and Ireland

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Global Overview

• Key World Economic Outlook projections from
  January 2010 with September 2010 updates
• World growth. After contracting by 1 percent
  in 2009, global activity is forecasted to expand
  by 3.9 in 2010 and 4.3 in 2011. Numbers have
  been since revised downwards to 3.7 for 2011 as
  of September 10, 2010 by Scotia Bank Group
• Advanced economies Medium term prospect of
  sluggish growth. Output in the advanced economies
  is now expected to expand by 2 in 2010. In
  2011, growth is projected to edge up further to
  2.1. The US economy is expected to grow at 2.5
  for 2011, slower than the original 2.8 projected
  earlier this year. Eurozone expected to be 1.1
  for 2011 with stronger numbers for Germany and
  England. Core inflation remains under control.
• Emerging and developing economies Outpacing
  the rest. Growth in Emerging and Developing
  Economies is expected to rise to 6 percent in
  2010. In 2011, output is projected to accelerate
  further. Between 6.5-7 Stronger economic
  frameworks and swift policy responses have helped
  many emerging economies to cushion the impact of
  the unprecedented external shock and quickly
  re-attract capital flows. China is expected to
  grow 10 for 2010, and 9.3 for 2011. Indias
  numbers have been revised upwards to 8.3 for
  2010 ( some as high as 8.8) and 7 for 2011.

Source World Economic Outlook Update
Policy-Driven, Multispeed Recovery January 26,
2010, Scotiabank group 2010, Morgan Stanley
Economic Forecasts September 2010
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July 2010 Data on recovery remains mixed. IMF
and the Fed predict that the factors for growth
are solid - HIGHER THAN THAT OF ECONOMISTS
Reference WEO Update July 2010 Data
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World Economic Outlook

• Historical Gross Domestic Product Growth 2006
  2011
• World
• Advanced Economies
• Emerging Developing Economics

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Latest OECD Projections - note how with
the numbers slow in the 3rd abd 4th quarters for
US and UK.
Source OECD, System of National Accounts
database Datastream MarkitEconomics Limited
OECD Economic Outlook 87 database and OECD
Indicator Model forecasts.
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Business Confidence has weakened Purchasing
Managers Index
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(No Transcript)
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What is happening now? - Tepid growth except for
developing countries

• China GDP is expected to grow in 2010 between
  10-10.5 and next year closer to 9-9.5 as the
  government tries to head off inflation.
• China Daily from 09-06-2010 reports In spite
  of high jobless rates, Europe is registering
  strong economic growth and the recovery base in
  the US is broadeningFor Chinese decision
  makers, all these sentiments and judgments are of
  no slight significance because their countrys
  economy is already deeply interwoven with the
  rest of the world.They further proceed to state
  that The coming five years can be divided into
  two parts. After massive stimulus investment and
  because the global economy is more likely to grow
  at a slower pace, Chinas economy may achieve
  moderate rate of about 8-8.5 in 2011-2012. After
  the first two years, China can have a stable 9
  growth when the global economy is in better
  shape.
• Indias economy is strong, with numbers revised
  upwards to end 2010 at 8.8 and 2011 at 8.4.
• Brazil will most probably end 2010 at around 7
  growth, but that will slow to closer to 4.1
  growth for 2011.
• The US economy has started to slow in its growth
  projections from earlier this year. It is
  expected to grow 2.4 for 2011, which is slower.
  The adjusted numbers for GDP growth for the 1st
  quarter of 2010 is 2.4 and for the second
  quarter, it projected at 1.6
• Germany and England are showing strong recovery
  from the Eurozone due to overseas demand for
  their products. China is the largest market for
  German automobiles, high luxury goods, and
  specialized equipment. Countries associated with
  similar export industries are also doing well
  like Sweden and France. However, Spain,
  Portugal, and Greece are still mired in some
  challenges.

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How can Asia keep growing?

• Asian economies are still highly dependent on
  exports so as the global economy improved,
  greater demand for their products
• Sub-Saharan Africas economy has been growing at
  a steady pace, with Asia being their largest
  trade partner
• Private domestic demand maintained momentum with
  the growth of the middle class and buying power
  of overall population
• Demand for high item luxury goods continues to
  increase with increasing wealth.
• Robust corporate profits and favorable financing
  in India
• China growth is driven by export rebound and
  domestic demand coupled with government
  intervention to prevent over heating and maintain
  financial stability.
• Risks are that any stalling in the European or
  American economy can slow growth. European bank
  situation is still tenuous. Asian banks,
  however, have the ability to deploy stabilizing
  measures.

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Some positive indicators for the US economy

• Companies are reporting strong earnings hopeful
  that they would gain confidence that they would
  start hiring soon
• Retail Sales (MoM)July Retail Food Sales
  Revised to 0.3 from 0.4 U.S. August Retail
  Food Sales Ex-Autos rose 0.6 U.S. August
  Retail Food Sales rose 0.4 Compared to
  Consensus of an increase by 0.3.
• Business Inventories (MoM) U.S. July Business
  Sales rose 0.7 Gain is Biggest in Four Months
  Increase in July Business Inventories is Biggest
  in Two Years U.S. July Business Inventories rose
  1.0
• IBD/TIPP Economic OptimismU.S. September
  IBD/TIPP Economic Optimism Index 45.3 versus 43.6
  in August.

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Economic Markers 2010 for US
Markers still show improvement, even if slower
US Federal Reserve, August 2010 release
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More positive news- Americas and Europe

• In the Eurozone, it is expected that 10 out of
  the 14 industries will grow in 2010, led by motor
  vehicles by 19.5. In 2011, 6 our the 14 will
  grow, primarily in the machinery and equipment
  building areas. For Central Europe, growth in 12
  of the 14 industries for 2010 but in 2011,
  electronics will see some volatility.
• For Europe, production in non-high tech
  industries is expected to increase by 5.1 in
  2010, and by 4.3 in 2011.
• Latin Americas economies are showing a sharp V
  shaped recovery from 2009. Brazil, Argentina, and
  Mexico are responsible for more than 80 of the
  manufacturing output for the region. Overall
  Manufacturing output will grow 8.3 in 2010 and
  will decelerate to 3.7 growth in 2011 which is
  more manageable.
• Most of the growth in Latin America will be in
  food and beverage, machinery and equipment
  production, along with motor vehicles. These
  three categories make up 40-45 of total
  manufacturing output for the region.
• US numbers while slowing still show that the
  manufacturing sector is recovering. The
  industrial rebound is stronger than the rest of
  the economy. Manufacturing has added over 100K
  jobs since the beginning of the year.
• Economic activity in the manufacturing sector
  expanded in August for the 13th consecutive
  month, and the overall economy grew for the 16th
  consecutive month, say the nation's supply
  executives in the latest Manufacturing ISM Report
  On Business.

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China and India

• India -14 of the 16 sectors for India show
  growth, with transportation equipment and parts
  leading the pack at 17 and 15 respectively.
  Machinery and equipment are also growing strong
  at 12. Other industrial, such as pulp and paper
  are expected to grow at 10.
• Stimulus related infrastructure investment will
  decline in China, but manufacturing production is
  still expected to grow swiftly. Chinas growing
  middle class is growing faster than that of any
  other countrys and their need for consumer goods
  and necessities will help set the tone for
  Chinas industrial output.

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What is preventing us from faster growth?

• Advanced Economies
• Banking crisis in Europe is still far from over
  - only purchaser of Greek Debt were other
  European governments.
• New banking rules formed in Basel will further
  tighten lending standards
• The new rules would make banks roughly double the
  amount of capital set aside as a buffer against
  possible losses, slash stockholder dividends and
  executive pay if that stockpile falls short, and
  limit lending during economic boom times. Goal is
  to curb lending in good times in the hope that
  asset bubbles won't give way to a costly bust.
• Arguments that this would further slow down the
  economic growth - Some financial industry
  analysts and groups have argued that the stricter
  standards would slow lending and economic growth.
  
• Fiscal deficits, mounting public debt
• Broad unemployment. August unemployment numbers
  remain high - at 9.6. Belief that in 2011,
  unemployment will remain high at 9.1. No
  lowering in numbers until 2012 where it is
  expected to go to 8.4 and then 7 by 2014.
• Only started adding jobs, but 7.6MM jobs were
  lost in this recession and GDP contracted 4.1.
• Consumer Spending remains tight
• Companies are showing great profitability but
  hiring is still meager.
• Housing and construction still showing poor
  recovery. Only Lennar and Toll Bros show some
  progress but it is from buying up loans
• New Home sales, pending home sales, and mortgage
  applications are at a 13-year low. New home
  prices have plummeted 30 on average. 8 million
  home loans are in some state of delinquency and
  another 8 million have less than 5 equity in
  their homes.

Wall Street Journal September 21, 2010
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Unemployment Data
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Deflation ?

• With mounting public debt, large fiscal deficits,
  concern about deflation in the US .
• Possibility highly unlikely - if economy
  shrinks, we would just enter another recession -
  recession officially declared over as of June,
  2009 means period of declining activity has
  ended, not that the economy is healthy.
• Reasons
• Institutional structure around the Fed and the
  political economy is highly adverse to deflation
• Feds goal is not just monetary policy but also
  the inclusion of employment. Feds inflation
  goals are made clear each announcement so
  investors understand. Accountability of Fed to
  Congress and need to testify before Sentate and
  House plays a huge role in terms of
  responsibility.
• Fed has tools they can deploy to head off
  deflation.
• Dollars international role encourages discipline
  on US policy
• Aging US population is not as rapid as that of
  Japans.
• US has run deficits for many years and is
  dependent on foreign nations for financing.
  Japan has always balanced their budget, but yen
  is a more local currency.

Morgan Stanley-Global Economic Forum September
10, 2010 Crisis, Credit, and Capital
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Focusing on this region..

• The Mid-American region looks stronger than the
  national economy, said Creighton University
  Economics Professor Ernie Goss.
• "Over the past several months, for example, the
  region has been adding jobs at a very healthy
  pace while U.S. job growth has been nil," he said
  in a statement. ( Reuters September 1, 2010)

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Midwest Manufacturing Index
Interesting to note his the output is 13.1
higher than a year ago, much higher than the
national average of 8.1.
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Individual key sectors for this region
Auto index is 27 above last year, Steel, highly
dependent on auto is also significantly up. Auto
industry still looks strong for 2011. Industrial
production and Machinery is slower but still
recovering. We expect strength in the
agricultural and off-highway segments
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Key sectors for this region their performance
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Industrial Rubber Goods- Outlook still shows
growth on a macro scale

• Global demand to rise 4 annually through 2011
• World rubber consumption is forecast to increase
  4.0 percent annually to 26.5 million metric tons
  in 2011. US, China and Japan dominate global
  rubber consumption, and will continue to do so,
  collectively accounting for more than half of the
  market in 2011.
• China has become the leading consumer of rubber
  worldwide, following more than a decade of strong
  growth in motor vehicle production and industrial
  goods manufacturing. The country overtook Japan
  as the second largest rubber market in the late
  1990s and by 2001 had essentially caught up to
  the US as the world's leading consumer. While
  China will continue to extend that lead, the US
  and Japan will remain leading markets worldwide.

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Industrial Rubber Goods- Outlook

• Non-tire rubber demand to outpace tire rubber
• Non-tire rubber will outpace tire rubber demand
  through 2011, based on a favorable outlook for
  mid-range elastomers(e.g.,ethylene-propylene,
  nitrile and polychloroprene) used in components
  such as hoses, belts, gaskets and weather
  stripping.
• Natural, synthetic rubber to both expand at
  strong pace
• Demand for both natural and synthetic rubber will
  expand at a strong pace, but the division of the
  market will remain essentially unchanged through
  2011, with synthetic rubber continuing to hold
  approximately 55 percent of demand and natural
  rubber holding the remaining 45 percent.
  General-purpose synthetic commodity elastomers --
  typically defined as SBR (styrene-butadiene
  rubber), BR (polybutadiene rubber) and IR
  (polyisoprene rubber) -- account for the vast
  majority of synthetic rubber demand.

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Resources

• Bharat Book Bureau Industrial Rubber Products
  forecasts for 2010 2017
• US Department of Housing
• U.S. Census Bureau News 2009-10 U.S.
  Department of housing and Urban Development New
  Residential Construction in January 2010
  January 2009
• World Energy Outlook - Online
• International Monetary Fund Online
• Bloomberg, Citigroup
• Nomura Global Economics - 2010 Global Economic
  Outlook
• HSBC Purchasing Managers Index Emerging Markets
  Index
• www.metalsplace.com - Metals and Mining Stock
  Review Jan. 2010 Industry Outlook January
  7, 2010
• www.federalreserve.gov/releases
• SP Indices
• www.chicagofed.org
• Bureau of Labor and Statistics
• Morgan Stanley Reports
• OECD Reports