April 04, 2018

China Heavy Equipment - Hydraulic Parts Inventory Insufficient as Demand Remains Strong

000157 CH, 000528 CH, 600031 CH, 6301 JP, 6501 JP, 7012 JP, CAT, KMTUY
By David Ren
Insufficient inventory in China of hydraulic parts used by heavy equipment OEMs is unlikely to recover soon, as strong demand shows no signs of moderating.

Background
In OTR Global’s Dec. 18 Heavy and Power Equipment report, Caterpillar Inc. equipment dealers around the world cited component availability as a significant constraint to increasing production. In the Feb. 7 China Heavy Equipment Manufacturers report, several heavy equipment dealers of Chinese OEMs echoed these comments, singling out suppliers of hydraulic parts as a bottleneck in China. In order to better understand the magnitude of this problem, OTR Global spoke with hydraulic parts manufacturers and dealers in China to assess hydraulic parts order and pricing trends, as well as current inventory conditions for China's heavy equipment market.

Hydraulic Component Inventory Insufficient, Unlikely to Improve Soon
Six of seven sources said current inventory levels of hydraulic parts used in heavy equipment, especially for large-size or medium-size excavators, are below desired levels. Sources said both Chinese and international heavy equipment OEMs are increasing production because of strong market demand. “Our inventory of hydraulic parts was insufficient because of expanding excavator demand since 4Q17. Although the situation has improved, we still have insufficient inventory for large-size excavators, like models of 850, 870 and 1200,” one source said.

Several sources said multiple heavy equipment OEMs often purchase hydraulic parts from the same manufacturer, which adds to the supply shortages. “It is quite normal for multiple equipment OEMs to place orders from a well-known brand at the same time. I heard Kawasaki [Heavy Industries Ltd. (7012 JP)] has good quality and brand reputation for its hydraulic parts. Its products can be used by Caterpillar, Komatsu [Ltd. (6301 JP)], Hitachi [Ltd. (6501 JP)], Volvo [AB], Hyundai [Heavy Industries Co. Ltd. (009540 KS)], Sany [Heavy Industry Co. Ltd. (600031 CH)], Xugong [XCMG Construction Machinery Co. Ltd. (000425 CH)], Guangxi Liugong [Machinery Co. Ltd. (000528 CH)] and so on. If one large OEM places a huge order, that can affect the supply of others,” a manufacturer said.

Sources do not expect availability to improve before the heavy equipment market enters the low season, typically at the end of the summer. “The supply issue could continue until the end of summer. After the low season, our inventory of hydraulic parts may return to normal levels this September,” one dealer said. Another said, “Because of the ‘Belt and Road’ initiative, market demand for heavy equipment will continue to be good. It's unlikely for it to alleviate. Maybe in the low season, supply could be relatively better.”

Several sources said lead times of hydraulic parts have extended. “In the past, customers could get hydraulic parts right away. Now they have to wait for 30-40 days. For some parts used in large-size excavators, lead times have extended up to four to six months,” one said.

Component Pricing Higher YY but OEMs Resist
Five of seven sources said current pricing of hydraulic parts is higher than one year ago, driven by ongoing demand strength, supply shortages and higher production costs. “Because of booming demand, current pricing for hydraulic parts has increased 7%-8% year to year. For some brands, they have a price premium over others. For example, the pricing of hydraulic pumps from Kawasaki is much higher compared with South Korean brands,” one said. The two sources reporting flat pricing yy said they expect prices to increase in the near future.

Several sources said the price increases are still somewhat limited as they feel pressure from heavy equipment OEMs. “Heavy equipment OEMs do not want us to increase the pricing too much as they are increasing promotions for heavy equipment in order to get market share. We almost have no profits in the domestic market because of high costs,” one manufacturer said.

1Q18 Orders Expected Up YY
Five of seven sources expect 1Q18 orders of hydraulic parts from heavy equipment OEMs to increase yy, as manufacturers have continued to expand their production in response to strong heavy equipment demand. “Driven by many big mining and infrastructure projects, heavy equipment demand remains strong this year. I think our hydraulic parts orders will increase about 15% yy in 1Q18,” a hydraulic parts manufacturer said. Another said, “Because of insufficient supply for some equipment, many heavy equipment OEMs are continuing to increase their hydraulic parts orders due to strong production activity during 1Q18.”

International Brands Dominate Hydraulic Parts Market
Sources said the Chinese hydraulic parts market is dominated by Kawasaki, Nachi-Fujikoshi Corp. (6474 JP), Nabtesco Corp. (6268 JP), Toshiba Corp. (6502 JP), KYB Corp. (7242 JP), Promax Tech Co. Ltd., Doosan Infracore Co. Ltd. (042670 KS), Bosch Rexroth AG, Parker Hannifin Corp. and Eaton Corp. PLC.

Sources said Chinese heavy equipment OEMs still largely rely on imports of hydraulic parts to meet the expanding demand of heavy equipment. “China has several hydraulic parts suppliers, but the supply is far from enough,” one said. Four sources said Chinese heavy equipment OEMs are best to work with because they are more aggressive to place orders during the current market conditions. “We are working better with the Chinese heavy equipment OEMs because we can supply all kinds of imported hydraulic parts to them. I heard that Sany and Xugong are increasing component orders very fast in the market,” one said. Several said some international brands, like Caterpillar and Doosan, produce a higher percentage of their own hydraulic parts. “Caterpillar produces its own hydraulic parts to use in its heavy equipment. It does not have big dependence for third-party,” one said.

Additional Quotes
“Overall heavy equipment demands are very strong driven by the government infrastructure buildout. And mining activity is also good. I think more mining and infrastructure projects will result in higher demand for heavy equipment and hydraulic parts in 1H18.”

“The increase of hydraulic parts orders this year won't be as big after the big increase last year.”

“The large-size hydraulic parts are in shortage a bit at present. But the inventory of mid- and small-size hydraulic parts is normal.”

“The production period for large-size hydraulic parts is longer. I think our inventory will come back after three to four months.”

“The availability of hydraulic parts will depend on the heavy equipment market. I expect the good market for hydraulic parts to continue as long as the heavy equipment market is good. If the market remains good, the supply will remain short.”

“Currently, the U.S. tariff reform has limited impact on our business. The heavy equipment demand and the pricing of hydraulic parts are mainly influencing the demand for hydraulic parts. However, if a large-scale trade war comes true, it would influence the exports and imports of heavy equipment and hydraulic parts.”

Contributors: Fu Guiqin and Sun Jina

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