Europe Manufacturing a Weak Spot as SKF Sees Stagnant Demand

A recovery in Europe’s manufacturing industry is struggling to gather steam, curbed by subdued demand for factory equipment and automotive parts, according to SKF AB (SKFB), a ball-bearing maker that’s a bellwether for industrial health.

While Europe and Latin America face restrained demand in the third quarter, orders from North America and Asia will be “slightly higher,” said Tom Johnstone, who has led the Gothenburg, Sweden-based company for more than a decade.

“The European market still isn’t driving the traction you would expect, especially in the industrial arena,” Johnstone said in an interview. “We’ve got to be ready to be flexible to meet an improving demand, but at the same time manage our costs as we are not getting the volume development.”

SKF makes bearings and seals that are essential components in everything from dishwashers to mining equipment and aircraft, making the company a barometer for manufacturing health. The recovery has been patchy since the euro zone emerged from recession more than a year ago, with aerospace, energy and railway brighter spots compared with heavy industry, cars and trucks, SKF said.

A Purchasing Managers’ Index for the manufacturing industry in the euro area fell to 51.8 in June. While the manufacturing gauge held above the 50 mark separating growth from contraction for a 12th month, the expansion pace was the weakest since November.

‘Slow End’

Factory activity slowed in Germany and Italy, and contracted in Greece, the PMI Index showed.

“In west Europe we didn’t see any real positive development in the main markets, such as Germany, U.K., Italy and Sweden, or France,” Johnstone said.

SKF experienced an especially slow end to the quarter for automotive industry products, with demand easing from car and truck customers, Johnstone said. “Whether or not that is just a correction before the summer we’ll see,” he said. “I don’t see any further weakness, but we’ve just got to monitor what happens.”

Economic confidence in the euro area unexpectedly declined last month, led by industry, as tensions in Ukraine and the single currency’s strength hindered efforts by the European Central Bank to boost lending and growth.

The Swedish company sees “continued uncertainty” among customers that will cause overall demand for products and services to be flat this quarter, Johnstone said.

China Battleground

Johnstone said he’s driving Asian expansion and taking share from Chinese competitors to counter lacklustre demand closer to home.

“There’s a sluggishness that’s hard to shake,” said Robert Bergqvist, chief economist at SEB. “At the end of last year, their was optimism among executives that 2014 would be a good year, but since then there have been setbacks.”

Scandinavia, an industrial heartland for manufacturing, will give further insight into European recovery when Atlas Copco AB (ATCOA), the largest maker of air compressors, and chainsaw manufacturer Husqvarna AB (HUSQB) report earnings tomorrow. Alfa Laval AB (ALFA), a maker of heat exchangers, and Sandvik AB (SAND), the No. 1 producer of metal-cutting tools, follow on July 17. Electrolux AB (ELUXB), the second-biggest home appliances company, rounds off a week with earnings from Swedish companies worth more than $100 billion in total on July 18.

“Unchanged sequential development indicate to us that underlying markets are yet to pick up,” Banco Espirito Santo SA said in a note to clients. However, SKF’s price and product mix had a positive effect for the first time in four quarters, the bank said, which “should be taken well.”

SKF’s stock rose 1.1 percent to 171.8 kronor at 11:28 a.m. in Stockholm. Atlas Copco declined 0.9 percent, while Husqvarna fell 0.6 percent.

Johnstone, who joined SKF in 1977, is also targeting 3 billion kronor ($441 million) in cost cuts through 2015 in a bid to reach SKF’s margin target of 15 percent. The operating margin, including one-time items, was 11.7 percent in the quarter compared with an average analyst estimate of 11.8 percent.

To contact the reporter on this story: Niclas Rolander in Stockholm at nrolander@bloomberg.net

To contact the editors responsible for this story: Andrew Noel at anoel@bloomberg.net Kim McLaughlin

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