Metalworking Machinery & Equipment
Date March 2021
- After a year of pandemic uncertainty, demand is slowly improving for new and used equipment.
- Manufacturers are pulling back on previously steep new equipment discounts.
- Buyer participation is increasing at used equipment auctions.
By the Numbers
Versatile Equipment Is Typically Widely Marketable: The metalworking manufacturing industry is diverse and covers a wide spectrum of smaller industry segments and asset types. Special tool, die, jig and fixture manufacturing comprise the largest segment of the industry at just over 28%, followed by metal cutting and machine forming machinery at approximately 25% and industrial mold manufacturing at approximately 20%. Each of these industry classifications is primarily composed of Computer Numerical Control (CNC) machine and fabrication shops.
Machine shops make up the industry’s largest market, which is driven by the performance of downstream markets such as automotive, aerospace, oil and gas, construction, agriculture and mining. Asset groups commonly found in CNC machine and fabrication shops include machining centers, turning centers, boring mills, laser cutters, punch presses, roll formers, turret punches, press brakes and shears. Lending institutions often have clients in these market segments, and asset-based lending is commonly predicated on these types of assets because of the versatility and historically wide marketability of the equipment.
The U.S. metalworking machinery manufacturing industry has decreased slightly in size over the past five years, according to industry research firm IBISWorld. The decrease is a result of continued competition from affordable imports and domestic manufacturers’ efforts to relocate abroad.
Processes within industry businesses often include machining, production, fabrication and maintenance, all of which utilize different types of metalworking equipment. The metalworking industry is very broad; however, the equipment used in the industry is relatively standard and typically universal across smaller market segments. As a result, these asset groups have historically tended to be easily salable on an overall basis.
CNC Equipment Market Showing Signs of Improvement: CNC machines process a piece of material to meet specifications by following a coded programmed instruction and without a manual operator. The used CNC equipment market tends to be very cyclical relative to the performance of downstream markets.
Market conditions were good throughout most of 2017 and 2018; however, machine tool orders for 2019 were down 17% from 2018, according to the association for Manufacturing Technology. Several factors such as trade wars, tariffs, sophisticated technological advancements, manufacturers’ continued pursuit of full automation and the cyclical nature of the industry all had a trickledown effect and negatively impacted the value of new and used equipment.
The aerospace industry experienced the grounding of the Boeing 737 Max Jet in March 2019 with suspension of production of the 737 in January 2020, and then markets were hit by the COVID-19 pandemic. The oil and gas industry suffered major challenges beginning in March 2020, including a sharp downturn in active rig counts and a crash in crude oil prices.
When a slowdown in major industries such as automotive, aerospace, and oil and gas occurs, the impact and ramifications are felt across most, if not all, of the metalworking manufacturing industry. These slowdowns ultimately resulted in depressed values of metalworking equipment throughout 2019 and into early 2020. As of early March 2020, it was not uncommon to see decreases in the value of used metalworking equipment ranging from 10% to 30% year over year, depending on the type and vintage. As a result of the tough market conditions, original equipment manufacturers cut back on pricing and discounted new equipment up to 30%, which significantly drove down the interest and value of late-model used equipment as well, and bottomed out the value of CNC equipment 10 years of age or older.
The onset of the pandemic only amplified the slowdown in sales. In March 2020, the Big Three U.S. automotive manufacturers suspended production, Boeing ceased operations, crude oil was at its lowest price per barrel since 1999 and state governments were issuing orders to close non-essential businesses. Dealers in this space compared market activity and sales to that of the Great Recession in 2008 and 2009 with very few to non-existent inquiries for new or used equipment.
While some uncertainties remain, indicators for the oil and gas, manufacturing, automotive and aviation industries have shown some signs of improvement throughout the first quarter of 2021, and forecasts are optimistic further out in the year.
While there has been increasing activity and production in the oil and gas industry, it is still struggling to recover with a North American rig count of 498 as of March 26, 2021, per Baker Hughes. This count represents a 36% decrease year over year but has shown significant improvement from the trough of 278 rigs seen at the end of June 2020. At just over $60 per barrel as of March 29, 2021, crude oil pricing is up about 200% year over year.
U.S. manufacturing technology orders totaled $456.7 million in December 2020, representing a 40% increase in orders from the prior month and a 17.6% increase over December 2019, per data from the Association for Manufacturing Technology. This was their highest monthly total since November 2018, and the third straight month of year-over-year gains was realized in January 2021.
Relative to 2020, early forecasts of new vehicle sales from the National Automobile Dealers Association and Cox Automotive predict increases ranging from 7% to 8% for 2021. Additionally, airlines reported increased bookings and flights in the first quarter of 2021, as travel restrictions have been lifted and vaccines continue to be rolled out. The Federal Aviation Administration approved a return to service for the Boeing 737 Max in November 2020 following a strict set of testing and training standards to be completed by individual carriers, reflecting another positive shift for the industry.
As a result, demand is slowly improving for new and used equipment, and manufacturers are pulling back on previously steep new equipment discounts. Additionally, buyer participation is increasing at used equipment auctions.
Over the past year, there has been uncertainty around how tough market conditions, in conjunction with the pandemic, would affect the economy, the industry segments the metalworking manufacturing industry supports and the values of used and new equipment in the metalworking space.
Now that ramifications can be somewhat quantified and downstream markets have shown signs of improvement, lenders who have not recently updated the values of assets in their portfolios may want to strongly consider a new appraisal that reflects the adjustment in market conditions.
Note: THIS PUBLICATION IS PROVIDED FOR INFORMATIONAL MARKETING PURPOSES ONLY. THE MATERIAL CONTAINED HEREIN SHOULD NOT BE REGARDED AS ADVICE, NOR RELIED UPON TO MAKE FINANCIAL, OPERATIONAL OR OTHER DECISIONS; NOR SHOULD IT BE USED AS A SUBSTITUTE FOR AN ASSET APPRAISAL. ACTUAL RECOVERY VALUES MAY VARY FROM TRANSACTION TO TRANSACTION AND THE RECOVERY VALUES REFERENCED HEREIN ARE FOR REPRESENTATIVE TRANSACTIONS WITHOUT REGARD TO SPECIFIC KEY FACTORS. THIS MATERIAL MAY BE REDISTRIBUTED ONLY IN ITS ENTIRETY, INCLUDING NOTICE OF COPYRIGHT. ALL RIGHTS RESERVED. ©2021 GORDON BROTHERS, LLC.
Reference sources: BAKER HUGHES, BOEING, IBISWORLD, OILPRICE.COM, THE ASSOCIATION FOR MANUFACTURING TECHNOLOGY, NATIONAL AUTOMOBILE DEALERS ASSOCIATION, COX AUTOMOTIVE