Pumps: A New Market Barometer. Update on the economic Situation and Development in Selected Sectors GRUNDFOS MACHINING INDUSTRY.

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1 GRUNDFOS MACHINING INDUSTRY issue 3, 2013 Pumps: A New Market Barometer Update on the economic Situation and Development in Selected Sectors be think innovate

2 2 GRUNDFOS MACHINING INDUSTRY issue 3, About Grundfos Industry Indicators 3 Pumps: The New Industry Market Barometer 4-10 Industry Indicators Fig Page 4-10 / Industry Indicators Fig. 1, Economic Expectations for Key Countries and Industry Sectors (Source: ZEW indicator, ZEW, 19 March 2013) Fig. 2, New Passenger Car Registrations in Europe (Source: ACEA, 19 March February 2013) Fig. 3, Machine Tool Order Intake in Germany (Source: VDMA, March April 2013) Fig. 4, Machine Tool Order Intake in Japan (Source: JMTBA, April March 2013) Fig. 5, Machine Tool Order Intake in U.S.A. (Source: AMT, 812 April February 2013) Fig. 6, German Business Climate Industry and Trade (Source: Business Climate Indicator, Ifo Institute, 22 March February 2013) Fig. 7, The Grundfos Global Automotive Indicators (Source: Automotive Information Platform, MarkLines.com, April March 2013) Fig. 8, The Grundfos Raw Material Price Index (Source: London Metal Exchange, Steel Business Briefing, CME Group, April March 2013) 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 2013 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 3, 2013 GRUNDFOS MACHINING INDUSTRY 3 commentary Pumps: The New Industry Market Barometer Can pump sales predict which way the market winds are blowing? Absolutely. Here is why. By Ole Gerlich, Sales Development Director, Grundfos Machining Industry Our world is turned by liquids. And where there are liquids there are pumps. Grundfos sells hundreds of thousands of pumps each year within the machining industry. You could say that pumps are a fundamental product in this industry. Therefore, why can t pumps be a reliable indicator as to how this industry is doing? When I look at how Grundfos Machining Industry s performance compares to the overall ups and downs in 2012, the numbers actually follow (if not predict by a few months) the global market s health quite well. Pumps are a fundamental product in the machining industry American growth In 2012, Grundfos saw a flat to small increase in global sales. Granted, we performed a little better than the general market itself which actually fell 5-10 percent. But thanks to some growth areas, we actually did okay. America one of those areas had a very nice year. Grundfos grew more than 15 percent in the US, and we can see the demand continuing to rise. Despite the turmoil with the presidential election and the poor economy, the American automotive industry the big consumer of machines did very well. The previous red figures are now in the black. Stagnation In Europe, the machine tool steam train began 2012 with full power, but then really slowed down by the end of the year. Germany and countries like Italy started strong, but faded off. Even an old machine tool country like Switzerland had a slow year. One can argue that this was due to the very high Swiss Franc, making it difficult for that country s machine tool manufacturers to stay competitive. Japan, the world s largest machine tool manufacturer, also had a great start in That slowed as well to some extent (again) due to the high local currency but this had a side effect. Because of the high yen, it can be easier for foreign companies to export to Japan. Machines from the outside are cheaper and more competitive than Japanese ones. On the other hand, if you talk with Japanese machine tool builders, they indicate their topline machines, the high-accuracy machines are still selling very well. The simpler machines are down in sales probably due to the low demand in China. In China, just remember that nobody can continue forever with high growth figures. We have seen heavy slow-down in China for equipment investments. This affects a country like Taiwan, which is among the top five in machine tool building, but which is really suffering. More than 60 percent of what Taiwan produces goes to China, and China s low demand has brought a decline in Taiwan. The Taiwanese industry keeps saying, Next quarter, next quarter, next quarter, but nothing has picked up. We can say now that they are closer to the bottom than to the top, so it can only go one way from here. Another big Asian machine tool producer, Korea, showed a trend like that we saw in Europe. There was a very nice performance in the first half of 2012, with much of the growth coming from big investments in the auto industry. Korea stagnated, however, by the last quarter. The main reason? We don t know. What s ahead? We expect that 2013 will be an upside-down version of 2012, where we will have a flat first quarter or two, but then a nice growth in the last half of the year. With the US continuing its slight growth, China will come back. The quietness in 2012 has created a new demand. The government s $586 billion stimulus package last summer is intended to go towards infrastructure projects. Similarly, Japan s new government has announced it will stimulate the economy with some big, public infrastructure projects. This has even caused the Tokyo Stock Exchange s Nikkei index to increase, and the yen to go down drastically by percent. This will make Japanese products far more competitive, and we expect Japanese demand for these machines to grow. The backlog of the previous year will likely cause an increase in domestic demand. Europe is still a big question mark. We still have the crisis in the South. On the other hand, Europe has decided it will manage, and that it has the resources to do so. Some people even say that the crisis is over, and southern Europe will start to grow again albeit very slowly. We do not expect Germany to grow in 2013, but perhaps the rest of Europe will cover up for this. Other areas, however, like Russia, have a big, growing demand. We might even see that Russia not only imports products, but that they begin producing them in Russia. All in all, we believe that it s not as bad as it looks. The time for growth may be closer than it seems perhaps bringing us a little positive surprise. Therefore, keep following the Grundfos monthly Industry Indicators, which can inform you on the market s ups and downs. We are on the alert for you bringing you this regular report on which way the wind is blowing in the machining industry.

4 4 GRUNDFOS MACHINING INDUSTRY issue 3, 2013 Grundfos analyst: Serious declines in order intake hit machine tool industry Generally speaking, business expectations are unchanged compared to those last month. Global manufacturing indexes of output and new orders continue to rise slightly, showing moderate, stable growth in global production. Meanwhile, the machine tool industry in Germany, Japan and the U.S. registered serious declines in order intake in February compared to last year. This downturn reflects the difficult situation of the automotive industry. Companies are predominantly positive but also observant. Frank Baake, Senior Strategy & Intelligence Analyst 1 Economic Expectations for Key Countries and Industry Sectors The ZEW Indicator of Economic Sentiment for Germany has increased by 0.3 points in March The indicator now stands nearly unchanged at a level of 48.5 points. Hence, after three substantial increases between December 2012 and February 2013, the indicator has stabilized in March at a respectable level. The political situation in Italy and the rescue package for Cyprus increased the risk for the Eurozone debt crisis to worsen again. These developments have possibly contributed to the fact that the indicator did not increase substantially this month. Economic expectations for the Eurozone have worsened in March. The respective indicator has decreased by 9.0 points to 33.4 points. 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 3, 2013 GRUNDFOS MACHINING INDUSTRY 5 ZEW Indicator of Economic Sentiment (Germany)

6 6 GRUNDFOS MACHINING INDUSTRY issue 3, New Passenger Car Registrations in Europe The European Automobile Manufacturers Association writes: In February, new car registrations pursued the downward trend commenced in October 2011, reaching their lowest level with less than 800,000 units. In total, 795,482 new cars were recorded in the EU, or 10.5% less than in the same month last year. From January to February, demand for new cars declined by 9.5%, amounting to 1,681,073 units. In February, the UK was the only country to post growth (+7.9%). All other significant markets faced a downturn ranging from -9.8% in Spain to -10.5% in Germany, -12.1% in France and -17.4% in Italy. Two months into the year, Germany (-9.6%) and Spain (-9.7%) performed similarly, compared to the same period a year earlier. France (-13.5%) and Italy (-17.3%) recorded a doubledigit downturn, while demand was sustained in the UK (+10.3%). 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 was -16.8% in February compared to the same month in 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 3, 2013 GRUNDFOS MACHINING INDUSTRY 7 Machine Tool Order Intake in Japan 4 The order intake for the Japanese Machine Tool Industry in February 2013 was -21.5% compared to February 2012, but +12.8% compared to previous month January 2013 (this should not be overvalued, as February typically surpasses January). 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, February U.S. manufacturing technology orders totalled $ million.. This total, as reported by companies participating in the USMTO program, was up 5.7% from January but down 10.6% when compared with the total of $ million reported for February With a year-to-date total of $ million, 2013 is down 11.9% compared with A month-to-month gain is certainly good to see, and these numbers seem to echo some of the other recent economic data, including gains in both factory orders and durable goods orders, said AMT President Douglas K. Woods. A year-to-date decline in orders compared to 2012 is in line with expectations we had for a slight slowdown in the first two quarters of 2013, though second-half growth is expected to offset the slump. This is in line with our economists predictions that orders for 2013 will stay relatively flat compared to For more information, visit the website at amtonline.org.

8 8 GRUNDFOS MACHINING INDUSTRY issue 3, German Business Climate Industry and Trade Ifo Business Climate Germany: After rising sharply last month, the Ifo Business Climate Index for German industry and trade edged downwards in March. Companies were slightly less positive about their future business outlook than in February, but assessed their current business situation almost as positively as last month. The German economy remains on track in a challenging environment thanks to strong domestic demand. In manufacturing the business climate indicator fell. Manufacturers assessed both their current business situation and future business developments less optimistically than last month. Export expectations sank clearly, but remain positive. 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 3, 2013 GRUNDFOS MACHINING INDUSTRY 9 The Grundfos Global Automotive Indicators 7 Data source: MarkLines Co. Ltd Data source: MarkLines Co. Ltd We see a typical slight increase for all major manufacturers in January after a seasonal decline in December. The February drop in China is mainly due to Chinese Year vacations.

10 10 GRUNDFOS MACHINING INDUSTRY issue 3, 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 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: Decreasing prices all around Commodity markets have been characterized by decreasing prices in March. The president of the European Central Bank, Mario Draghi, spoke positively about the future European economy. This resulted in commodities, especially copper, to rise a bit. In Europe, the unstability in Cyprus is currently the main concern of the financial- and commodity markets. Adding to this, a declining German PMI of the manufacturing industry puts pressure on commodity prices. Copper prices ended up 5% lower compared to February, mainly caused by the unstable situation in Cyprus. Also, increasing copper inventories was a key driver of the price decline. Inventories have reached the highest level in 9 years. European stainless steel surcharges are mostly lower for April, flat product producers announced, as the price of nickel on the London Metal Exchange the main driver for some of the alloy surcharges, moved lower over much of March.

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