GRUNDFOS MACHINING INDUSTRY. issue 5, the hidden factor. Update on the economic Situation and Development in Selected Sectors.

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1 GRUNDFOS MACHINING INDUSTRY issue 5, 2012 the hidden factor Update on the economic Situation and Development in Selected Sectors be think innovate

2 2 GRUNDFOS MACHINING INDUSTRY issue 5, About Grundfos Industry Indicators 3 The hidden side of efficiency savings 4-10 Industry Indicators Fig Page 4-10 / Industry Indicators Fig. 1, Economic Expectations for Key Countries and Industry Sectors (Source: ZEW indicator, ZEW, 17 July 2012) Fig. 2, New Passenger Car Registrations in Europe (Source: ACEA, 15 July 2012) Fig. 3, Machine Tool Order Intake in Germany (Source: VDMA, August 2012) Fig. 4, Machine Tool Order Intake in Japan (Source: JMTBA, August 2012) Fig. 5, Machine Tool Order Intake in U.S.A. (Source: AMT, 9 July 2012) Fig. 6, German Business Climate Industry and Trade (Source: Business Climate Indicator, Ifo Institute, 25 July 2012) Fig. 7, The Grundfos Global Automotive Indicators (Source: Automotive Information Platform, MarkLines.com, August 2012) Fig. 8, The Grundfos Raw Material Price Index (Source: London Metal Exchange, Steel Business Briefing, CME Group, August 2012) About Grundfos Industry Indicators This quarterly newsletter can give you a general idea of which way the wind is blowing in the machine tools industry. It is a special supplement to our subscribers of Knowledge Link, our new website for the machining industry. Almost all the charts and graphs here are publicly available. They come from the three major machine tool associations in Germany, Japan and the United States as well as global surveys from market analysts. We make the final graphs ourselves, the Grundfos Raw Materials Index and the automotive Monthly Production Output by country and manufacturer. We build the latter up from available automotive production figures. Grundfos Machining Industry segment uses automotive production statistics, because that market is such a big part of the machine tools industry. Based on that, we try to estimate how the coming one- to three months will look. Why do we want to share these statistics? Because we have a common interest in seeing how the market is doing. So please: read these statistics and comments as indicators alone. We publish a full version of the Grundfos Industry Indicators quarterly in five languages, as well a monthly version in English only. The Grundfos Industry Indicators Copyright 2012 Grundfos A/S. Permission to reprint graphs, tables and data has been granted to Grundfos from the various organisations represented in the publication. If you have comments or questions on the data from those organisations, please contact them directly with the links provided. We welcome your other comments.

3 issue 5, 2012 GRUNDFOS MACHINING INDUSTRY 3 commentary The hidden side of efficiency savings Reducing energy is far from the only way to improve the By Ole Gerlich, Sales Development Director, Grundfos Machining Industry bottom line Times are getting tough for the machining industry. After the golden years of , it seems that 2012 is turning into a year of decline. We are now seeing the German machine tool industry fall about 10-15% according to German VDMA (page 6), a big drop that takes it back to its 2008 level. Japan is stagnating, selling well below 2011 and its top year of 2008 (page 7). China s boom in consumption of machine tool equipment seems to be slowing down. To control inflation, the country has put several measures into place, such as restrictions on loans for new production equipment. USA is seeing a bigger demand, but it is too small to affect the big picture. The hidden factor When you are in a slowdown market, it is important that you focus on improving wherever you can. Our industry is talking about efficiency. Grundfos and many other companies talk about saving energy as one way to improve efficiency. By saving energy, we save not only some money, but we also save CO 2, and that is good for the climate. That is all extremely important, of course. Grundfos supplies premium equipment that is best in its place in energy savings. Our motors come with higher efficiencies (IE2 and IE3) Rent/Lease 1.3 % Services 1.6 % Contract work 2.2 % Depreciation 2.6 % Cost control 3.1 % Goods 11 % Other 12.9 % Personal 17.8 % Source: German Federal Statistical Office, 2010 than laws require such as Europe s Energy Using Products (EuP) legislation on high efficiency pumps. So: energy is important, but it is not the only factor in improving performance and your company s bottom line in today s market. If you look at the total costs of producing, say, a gear wheel, energy accounts for only around 2-3% of the total component cost, according to the German Federal Statistical Office (see chart below). The material itself makes up somewhere between 40-50% of the cost. Imagine what happens to your bottom line if you can save 10% of the material. What if you can save half? Running low Resources affect our bottom lines more and more. Oil prices have risen extremely. If you look at the most common metals copper, aluminium, stainless steel their prices have all increased heavily over the last ten years (See graph for copper). Quite simply: we are running out of resources. Can you imagine running out of copper? All electrical equipment needs copper. One study (Roper 2011) shows that we will extract all of the world s copper resources completely within the next years. Energy 2.1 % Material 45.4 % Source: Metal Bulletin Obviously, this gives another good reason for you to find ways to save on materials. You are not only saving your company on the side of rising costs, but you are saving the planet in another way. Smart water use Water consumption is also challenging the planet, as freshwater sources disappear and the population grows. We know it takes 148,000 litres of water to produce a car. Some industries are being forced to adapt, finding new ways to conserve and reuse water, and these are the pioneers. One good example includes the Nissan plant near Bangalore, India. They simply cannot get the necessary amount of water from their municipality, and on top of that, the quality is poor. Nissan thus built a reservoir that collects rainwater from its own factory s huge roof area. They treat the water, use it, then recycle and reuse it in the production. Look at the whole process Last but not least, look at your support resources. These are things like coolant, which you use to lubricate your machinery. Up to 35% of a machine s total energy consumption comes from coolant supply, according to research from the Laboratory for Machine tools and Production Technology at RWTH Aachen University. Why do I mention all of this as a pump supplier? Because if we should add value for our customers, then it is important to focus not only on the pump itself but on the entire manufacturing process. Last year we introduced our Grundfos Design Tool, the first do-it-yourself desktop program that can allow people to design their coolant, nozzles, pipes and pumps for resource-efficient machining operations. Pumps and pump systems in this application are frequently dimensioned poorly. By designing the right system, you will not only improve your machining process but you will be saving materials, water, energy and money. In the future, we are also planning to expand our Grundfos Pump Audit service to a full Machine Audit, helping customers to analyse the total machining process. Together, we must find ways of reducing the amount of wasted materials and resources. We are not just looking for a shortterm fix during a tough economic time. We are looking for a solution that will carry us long into the future that can both help save the planet and our bottom lines.

4 4 GRUNDFOS MACHINING INDUSTRY issue 5, 2012 Grundfos analyst: Eurozone problems affect business climate in stronger economies The previous reported downward trend of the global economy remained in July, essentially caused by a weak Southern Europe, which increasingly is influencing the business expectations in the stronger economies like Germany. Order intake and production figures for the machine tool manufacturing and automotive industry have stabilized in Q2, without extreme oscillations. Frank Baake, Senior Strategy & Intelligence Analyst 1 Economic Expectations for Key Countries and Industry Sectors The ZEW Indicator of Economic Sentiment for Germany has dropped by 2.7 points in July This represents the third decline in a row. The indicator is now standing at a level of minus 19.6 points. This value is below the indicator's historical average of 24.0 points. Economic expectations for the Eurozone have declined by 2.2 points to minus 22.3 points in July. The decline of the economic expectations concerning the end of 2012 is flattening out gently, says ZEW President Prof. Dr. Dr. h.c. mult. Wolfgang Franz. This could possibly be an early sign of an encouraging development in However, risks should not be underestimated. Besides the weak demand from the Eurozone for German exports, the German economy is also burdened by weakening growth dynamics in other important partner countries. The ZEW Indicator of Economic Sentiment is ascertained monthly. Up to 350 financial experts take part in the survey. The indicator reflects the difference between the share of analysts that are optimistic and the share of analysts that are pessimistic for the expected economic development in Germany in six months. The survey also asks for the expectations for the Euro-zone, Japan, Great Britain and the U.S.A. For more information, visit ZEW s website at zew.de.

5 issue 5, 2012 GRUNDFOS MACHINING INDUSTRY 5 ZEW Indicator of Economic Sentiment (Germany)

6 6 GRUNDFOS MACHINING INDUSTRY issue 5, New Passenger Car Registrations in Europe The European Automobile Manufacturers Association writes: In June, new passenger car registrations declined by 2.8% in the EU, continuing the downward trend commenced in October last year. In total, 1,201,578 new cars were registered in the region in the month, which counted on average the same number of working days as in June In the first semester this year, demand for new cars was down 6.8%, compared to the first half of 2011, amounting to 6,644,829 units. From January to June, Germany (+0.7%) and the UK (+2.7%), the two largest markets, performed better than in the first six months of last year. Downturn prevailed in Spain (-8.2%), France (-14.4%) and Italy (-19.7%). For more information, see ACEA s website at acea.be. 3 Machine Tool Order Intake in Germany For the German machine tool industry, the order intake in June was -23.1% compared to the same month in 2011, according to figures from the German Engineering Federation (VDMA). The domestic demand has increased during the last 2 months, contrary to the continuous downturn in exports. The VDMA (Verband Deutscher Maschinen- und Anlagenbau - German Engineering Federation) is a network of around 3,000 engineering industry companies in Europe. For more information, please visit the VDMA s website at vdma.org.

7 issue 5, 2012 GRUNDFOS MACHINING INDUSTRY 7 Machine Tool Order Intake in Japan 4 The order intake for the Japanese Machine Tool Industry in June 2012 was -5.5% compared to June 2011 and +3.6% compared to previous month May 2012, according to figures from the Japan Machine Tool Builders Association (JMTBA). For more information, please visit the JMTBA s website at jmtba.or.jp Machine Tool Order Intake in U.S.A. 5 The Association for Manufacturing Technology (AMT) writes, May U.S. manufacturing technology orders totalled $ million according to AMT - The Association for Manufacturing Technology. This total, as reported by companies participating in the USMTO program, was up 14.5% from April and up 19.0% when compared with the total of $ million reported for May With a year-to-date total of $2, million, 2012 is up 12.1% compared with The United States Manufacturing Technology Consumption (USMTC) report, jointly compiled by the two trade associations representing the production and distribution of manufacturing technology, provides regional and national U.S. consumption data of domestic and imported machine tools and related equipment. Analysis of manufacturing technology consumption provides a reliable leading economic indicator as manufacturing industries invest in capital metalworking equipment to increase capacity and improve productivity. For more information, visit the website at amtonline.org.

8 8 GRUNDFOS MACHINING INDUSTRY issue 5, German Business Climate Industry and Trade Ifo Business Climate Germany: The Ifo Business Climate Index for industry and trade in Germany fell in July. After improving last month, assessments of the current business situation were more cautious again this month. Expectations in terms of the business outlook were also more pessimistic. The euro crisis is having an increasingly negative impact on the German economy. The Ifo Business Climate Index is based on ca. 7,000 monthly survey responses of firms in manufacturing, construction, wholesaling and retailing. The firms are asked to give their assessments of the current business situation and their expectations for the next six months. They can characterise their situation as good, satisfactorily or poor and their business expectations for the next six months as more favourable, unchanged or more unfavourable. The balance value of the current business situation is the difference of the percentages of the responses good and poor ; the balance value of the expectations is the difference of the percentages of the responses more favourable and more unfavourable. The business climate is a transformed mean of the balances of the business situation and the expectations. For calculating the index values, the transformed balances are all normalised to the average of the year The CESifo Group, consisting of the Centre for Economic Studies (CES), the Ifo Institute for Economic Research and the CESifo GmbH (Munich Society for the Promotion of Economic Research) is a research group unique in Europe in the area of economic research. It combines the theoretically oriented economic research of the university with the empirical work of a leading Economic research institute and places this combination in an international environment. For more information, visit the website at cesifo-group.de.

9 issue 5, 2012 GRUNDFOS MACHINING INDUSTRY 9 The Grundfos Global Automotive Indicators 7 Data source: MarkLines Co. Ltd Data source: MarkLines Co. Ltd Numbers in May stabilized after the typical seasonal drop in April month.

10 10 GRUNDFOS MACHINING INDUSTRY issue 5, The Grundfos Raw Materials Price Index Raw Materials Update Source: London Metal Exchange, Steel Business Briefing, CME Group. Raw materials price index, General status July 2012 Brass Neodymium Copper Aluminum Nickel Stainless steel Ferro-Chrome Ferro-Molybdenum Steel Scrap (EU) Cold rolled coil Plastic PET Plastic PA6.6 Crude oil EUR/USD Monthly price development (% change) -15,0-10,0-5,0 0,0 5,0 10,0 Source: London Metal Exchange, Steel Business Briefing, CME Group. Grundfos Cost Analyst Jesper Bjerregård Juul comments on the price fluctuations of raw materials and their impact on the manufacturing industry. He writes: Commodities in regression Volatility and weakness in commodity prices are likely to persist in the short-term as a lingering cloud of economic uncertainty has forced investors to retreat from high yielding assets. Support came from the G-20 leaders fresh efforts to stimulate the global recovery and address the financial crisis. The question remains on whether Europe will be able to avoid a debtdriven catastrophe. Focus is currently on Spain and Italy, two countries considered too big to fail. Investors are also alert about the implications of a deepening slowdown in Asia, where lower actual consumption for energy and metals and weaker economic growth has affected the behaviour of its long-term investors. Base metals prices ticked up during the official trading session on the London Metal Exchange on Friday July 27, on positive comments from European Central Bank chief Mario Draghi, who said that the bank will do whatever it takes to preserve the Euro.

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