Asia capex drought seen lasting through 2010

SYDNEY/TOKYO (Reuters) - An electronics components maker in western Japan was sure its clients wouldn't boost spending any time soon ... so it converted idle factory space and began baking cookies.

The plight of NE Works, which in normal times makes sensors and small LCD panels for auto and electronics firms, underscores how far a slump in demand has hit suppliers across Asia.

And, if fund managers and economists are correct, NE Works may be baking cookies well into next year.

Demand over the next five years will be so weak that the International Monetary Fund expects the world to see a widening negative output gap from now until 2014, which means factories will produce far less than they can, giving firms little incentive to invest more.

The IMF estimates the output gap in advanced economies will hit -5.1 percent in 2009. In Japan, the gap may be -8 percent.

Asian firms are saddled with excess capacity after over-investing before the global economic boom crumpled last year. The most bullish forecasts suggest they won't raise spending to increase output again until next June.

"We're having the worst recession in 60 years so companies are not about to sign a cheque anytime soon, especially since a lot of companies entered the crisis with excess capacity," said Joseph Tan, chief Asian economist at Credit Suisse in Singapore.

Combined spending by companies in Japan, Australia, Hong Kong, South Korea, Singapore, Taiwan, Malaysia and Thailand totalled $1.6 trillion in 2008, economist estimates show, virtually unchanged from 2007.

Thanks to the fast-growing engines of China and India, strong investment by mining giants in Australia and government pump-priming, capital spending will probably hold up better in 2009 than in the United States and Europe, economists say.

That could create opportunities for investors even after the recent run-up in share prices.

One of the big swing factors is China, which does not provide official figures on private spending. Government data puts total fixed investment, which includes both private and public outlays, at $2.5 trillion last year.

On top of that, China's government has promised to spend 4 trillion yuan (355 billion pounds) to shore up the economy, with money set aside for housing, infrastructure and power grids.

That could help boost profits at infrastructure and utility firms such as China Railway Construction Corp, China South Locomotive & Rolling Stock Corp and Shanghai Electric Group.

In India, the government is expected to unveil more stimulus in its budget early next month, potentially benefiting power producer NTPC Ltd and cement maker ACC.

"Investors in Asia should just focus on the domestic names," said Desmond Tjiang, chief investment officer for Asia ex-Japan at Fortis Investments.

"Some of the industrial names like those in China, as well as those in India and Indonesia, will benefit from infrastructure projects," said Tjiang, who manages $3.1 billion.

OVER-ESTIMATIMG A RECOVERY?

Asian companies have been rushing to run down inventories since last year, and some sectors have been able to roll back production cuts, fuelling expectations the economy may have turned the corner and helping push share prices higher.

But anecdotal evidence from companies offers a mixed picture.

Bridgestone, for instance, has started production at a new plant in Japan three months ahead of plan due to strong demand for its tyres used in mining and construction.

Nippon Steel, the world's No.2 steelmaker, said its factories may run at nearly 70 percent capacity from July to September, up from 55-60 percent now.

But it warned against overestimating the lasting power of the recovery, noting a murky outlook for autos and shipbuilding.

"We haven't seen a solid recovery in demand yet," Nippon Steel Executive Vice President Shinichi Taniguchi said.

Iron ore giant Rio Tinto is also cautious, saying it wants to cut investments in 2009 even though its iron ore production plants are running at nearly 90 percent capacity, helped by record stockpiling in China.

Factories in Japan, Asia's largest economy, are one-third idle. Companies usually only stump up new investment when factories use 80-90 percent of their production capacity.

"A lot of firms are running at very low capacity rates, so there's little need to expand," said Robert Subbaraman, chief economist at Nomura, predicting that spending would not pick up until the second quarter of next year.

The outlook for demand is not encouraging either.

The Organisation for Economic Cooperation and Development predicts global trade growth, adjusted for inflation, will fall 13 percent this year, before recovering just 1.5 percent in 2010.

That doesn't bode well for tech exporters, analysts say.

Mark Mobius, who manages $24 billion in emerging market assets at Templeton Asset Management, expects South Korean exporters to be among the last to recover in Asia since they suffered one of the sharpest declines in sales.

Samsung Electronics, the world's top maker of memory chips, has said it would be conservative in investments this year after spending 11 trillion won in 2008. That could dampen any recovery in orders at chip equipment makers such as Advantest.

"Even if capex recovers (in 2010), it won't reach the level seen in 2006-07 as the memory chip industry is consolidating and the number of players is declining," said Kim Sung-in, an analyst at Kiwoom Securities in Seoul.

(Additional reporting by Mayumi Negishi in TOKYO, Rhee Sou-eui in SEOUL and Raj Kumar Ray in NEW DELHI)

(Editing by Ian Geoghegan)