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US machinery sector: What can we expect in 2018?

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US machinery sector: What can we expect in 2018? article image

The United States-Australia Free Trade Agreement (FTA) came into force on January 1, 2005.

Since then, US goods exports to Australia have grown 59 percent and US services exports have more than tripled.

Last year Australia was the US’s 24th-largest goods trading partner. Top US export categories for goods were machinery, vehicles, aircraft, optical and medical instruments, and electrical machinery. The US is Australia’s third-largest goods trading partner, after China and Japan.

The US is the world’s largest market for machines/engineering, as well as the third-largest supplier. US machinery manufacturers’ share of the domestic market is about 50 per cent.

Revenues in the engineering services industry have rebounded since 2015 after some years of decrease, as greater liquidity in financial markets helped to boost spending on new construction.

The US machines/engineering sector is expected to record value added growth of 2.7 per cent in 2017 and even 4.0 per cent in 2018.

Infrastructure spending expected to expand

Construction-related machinery businesses are expected to benefit in 2017 from construction projects in the US, which are forecast to increase 5.9 per cent. Infrastructure spending is also expected to expand in 2018, supporting the sector. Quality engineering products will remain in very high demand throughout most industrial segments in 2017 and 2018.

That said, machinery businesses related to the oil/gas or the mining segments have been affected by lower capital spending on purchasing machinery and equipment. However, with oil and gas prices forecast to rise in 2018, this could increase capital spending on equipment next year.

In general, the dependency on bank financing of this capital-intensive industry is high, and US banks are principally willing to provide loans to the sector.

The average payment duration in the US machinery industry is 30 days, however, payment terms can be longer as capital equipment can carry a higher price tag.

Payment experience over the last two years has been good, with a relatively low number of non-payment cases, and it is expected that those will decrease further in the coming six months.

Moderate credit risk

Compared to other US industries, the number of insolvencies is low in the machinery sector. Business failures are expected to decrease about four per cent in 2017 and two per cent in 2018, in line with the overall US business insolvency development.

Due to the moderate credit risk, our underwriting stance for the US machinery sector is generally open. However, some caution is still advised on machinery businesses dependent on the oil/gas and the mining industry due to their still uncertain business outlook.

The same applies to machinery companies and their buyers located in areas affected by Hurricane Harvey.

Therefore, the sector outlook for the US machinery sector remains ‘fair’ for the time being.

Mark Hoppe is managing director, ANZ, Atradius

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