FTSE 350: Engineering is slowing down

But a different storm is now brewing; it has been in the offing for some time now. Industrial production is drowning both in the UK and overseas. Industrial production in the UK fell 0.8 per cent in the three months to November 2018, according to the Office for National Statistics (ONS). A lazy forecaster might limit their analysis to Brexit, and urge investors to seek cover from the UK and its political tempest. But Eurostat, the European Commission’s statistics bureau, said that industrial production in the eurozone fell 1.7 per cent over the three months to November – it was down 1.9 per cent in Germany. Suddenly, Spirax-Sarco’s (SPX) acquisition of German valves and heat control business Gestra looks less lucrative than it did back in April 2017, when it was acquired. These numbers are the latest in a longer downward trend that signals an alarming slowdown in global industrial output.

Cars are chiefly to blame for the damning headline figures, according to the ONS. Production of motor vehicles, trailers and semi-trailers fell 2.4 per cent in the three months to November. “The weakness was driven by the impact of shutdowns within this industry in October 2018 in addition to reduced production in November 2018,” the statistics body said. It looks like the situation is going to get worse before it improves. Temporary factory shutdowns are being planned by manufacturers including Honda and Mini in the days following Brexit. The impact will be felt further down the supply chain.

Engineer IMI (IMI) is exposed here. Full-year results in March indicated that its precision engineering unit benefited from growing demand for industrial automation and commercial vehicle-related products. But anaemic trading conditions in IMI’s two other divisions, which cover critical and hydronic engineering, dampened its overall performance. Management has since upgraded expectations, noting a recovery in its hydronic division over the first half of 2018. Falling vehicle sales in China are going to harm the automobiles parts supply chain, so IMI will need the resurgence in other parts of its business to continue.

The costs of various inputs have also taken their toll on engineering groups. Increases and fluctuations in the cost of zinc have made it hard for the aforementioned Hill & Smith to pass these on to consumers. These costs typically take six months to pass through the supply chain – the good news is that inventories of kettles made with the pricier zinc have been depleted, and the cost of zinc has since come down. Molten metal flow engineering specialist Vesuvius (VSVS) did a better job at moving raw material costs on to consumers, but the shares have dipped since September.

Technology group Smiths Group (SMIN) will provide an interesting watch in 2019. It continues its search for a home for its medical division – it has been trying, and failing, to sell Smiths Medical since 2011. Rather than sell the division as one part, management is weighing up options that could include selling to a private equity firm or a rival, or de-merger and IPO of the business. An update is expected in March.