Inventory replenishment fuels demand in EU mechanical engineering industry

Production in the mechanical engineering industry in the European Union declined 4.6 percent year on year in the first quarter of 2010. Nevertheless, coming from a 25 percent drop in output in the whole of 2009 and a 20 percent decrease in the final quarter of last year, the relative improvement in business conditions in this sector has been significant in recent months, said the European Confederation of Iron and Steel Industries (EUROFER) in its third quarter report of the ‘Economic and Steel Market Outlook 2010-2011'.
 
The rapid rebound of the emerging Asian countries - led by China and followed by most other economies in the region - resulted in international demand for capital goods strengthening since the second half of 2009 and, consequently, the global manufacturing sector gaining traction.
Also mechanical engineering companies in the EU have been able to benefit from the pick-up in demand owing to their focus on technologically advanced products for the most demanding end-markets.
 
Since the start of the year, also internal momentum in the EU has started to strengthen again. This is reflected in the marked rise in both export and domestic order intakes in recent months as reported by the German mechanical engineering association VDMA. Given the dominance of German industry in the mechanical engineering industry, this can be seen as a barometer for general business conditions in the EU.
 
The key factor driving EU demand in the mechanical engineering industry appears to be inventory replenishment rather than demand for new plant and equipment, said EUROFER. Most companies have been running down stocks of industrial spare parts and components during 2009 as part of their survival strategy. Improving capacity utilization and the restart of maintenance programs require restocking.
 
Expectations for EU mechanical engineering industry in 2010 and 2011
 
EUROFER's estimates for the output of the EU mechanical engineering industry in the second quarter of 2010 signal more than four percent growth year on year.
 
The growth rate in activity may even accelerate further in the coming quarters supported by a rather robust outlook for exports with the weak euro working in favor of EU exporters. Further support will come from stock replenishment. Total output is forecast by EUROFER to rise by more than 2.5 percent in 2010.
 
A steady growth trend of on average six percent year on year is on the cards for 2011. EU investment looks set to start growing again following three years of decline. In addition, prospects for international export demand for plant and equipment are to remain quite favorable, according to the EUROFER report.