Planning on Investing in Equipment? Best Be Decisive
17. December 2014
Every year Gardner Business Media, the Cincinnati-based parent company of Plastics Technology, does research on what plastics processors plan on buying in the way of capital equipment in the year ahead. Within the next few weeks, we’ll have the full report of this study in the print pages of Plastics Technology, as well as posted on this website.
For now, let me share some thoughts with you as I perused the manuscript, which was written by Steve Kline Jr., Gardner’s director of market intelligence.
My first reaction was that NPE ’15 could not have come at a better time. My second reaction, as I dug deeper into the analysis, was that processors need to be decisive in their buying plans if they have their sights set on something in particular this year.
Steve is projecting that processors will invest $5.4 billion on primary processing machinery, auxiliary equipment, and molds this year, a $17% uptick over what was laid out in 2014. As a processor, you might be tempted to respond to this with an ambivalent shrug. You might think something like: “So sales of robots are going to increase a lot in 2015. That’s nice, but I’m a molder; I don’t make or sell robots, I buy and use them. How does that impact me?”
It impacts you, because as Steve astutely pointed out, an increased demand for machinery will influence how long it will take you to accept delivery and ultimately commission your new product, whether you will be able to get your “first choice” to begin with, and perhaps even what you’ll have to pay for it.
“Processors should expect longer delivery on equipment orders as the year progresses,” Steve explains. “When demand increases rapidly … suppliers may have a hard time ramping up production fast enough. As orders build up in the pipeline, delivery times typically grow longer and longer. Because a significant amount of processing equipment acquired in the U.S. is imported, shipping times from overseas can exacerbate the problem.”
He continues, “Equipment and mold prices are likely to rise during 2015. This is a supply-and-demand issue. When demand rises rapidly and builders cannot increase the supply as fast as demand is rising, the price of machines and molds tends to increase to balance things out.”
And last but not least: “The longer processors wait before pulling the trigger on an order next year, the more unlikely it is that they will be able to buy their first choice of equipment.”
Steve’s bottom line? If you are serious about making an investment in capital equipment, it might be better for you to act sooner rather than later. Over the 28 years I have covered this industry, I have heard time and again—from both processors and suppliers—about investment plans that have either been delayed or scaled back. But as business conditions among processors continue to improve, any delay could put you at a competitive disadvantage. In other words, there are reasons beyond delivery times and purchase price for you to act quickly.
Steve points out the U.S. monetary base is an excellent leading indicator of primary plastics processing equipment consumption. Historically, changes in the monetary base lead changes capital equipment consumption by 24 months on average, as the chart above indicates. The monetary base saw its peak rate of growth in the summer of 2014, which means processing equipment consumption should see accelerating growth through 2015 and possibly into 2016.
As Steve points out, most processors make investment decisions based on capacity utilization—how busy existing equipment is right now. Generally, the Gardner survey shows that the need to increase capacity has been the number one motivator for plants to buy new capital equipment. This finding has not changed in 25 years.
Capacity utilization is at its highest level since late 2007, and has been increasing at an accelerating rate, as the chart above shows. This is likely to continue, and based on the correlation between backlogs in our business index and capacity utilization, capacity utilization could reach 80% in 2015 for the first time since January 2007, and capacity utilization could average more than 80% for the first time since 2006
So am I recommending you come to NPE with your checkpoint and a purchase order in hand? Not necessarily. But think about having them in your pocket.