Insights Industry Insights Still Digging Out

       

Construction Machinery: Still Digging Out

By: Spencer Wilichowski, AccuVal Associates, Inc.

The new and used construction machinery market in the U.S. is expected to see a slight uptick in demand in 2011; however, many challenges still stand in the way of a full recovery. Tightened credit availability, excess industry inventory, lack of housing starts and an increase in steel prices have eroded domestic sales and revenue in recent years, and it may be some time before the industry regains momentum. As demand for construction machinery and equipment remains weaker in the U.S., manufacturers will continue looking to the international markets to boost revenue.

SUPPLY

Industry dominated by a few major players

Even though there are nearly 800 construction machinery manufacturers in the U.S., industry revenue generation is dominated by only a few companies: Caterpillar (33%), Deere & Company (8%), Terex Corporation (6.4%) and CNH Global N.V. (6.1%). With a meager 2.9% annual growth expected over the next five years, expect market share of major players to increase as they continue to lead the market in brand loyalty, technological innovations, product availability and timely delivery. These factors will help the major players’ revenue to increase at a greater rate than their peers in the short term.

Used equipment continues to compete with new sales

There is still a large amount of used equipment on the market that is competing with new product sales. In speaking with dealers and analyzing machinery and equipment resale companies and auctioneers, there remains huge discrepancies between asking prices and actual sales or auction prices. For example, it has been observed on Machinery Trader that auction prices of some late model equipment with low hours have been 50-60% of asking prices. However, it is becoming harder to find good quality, late model used equipment, and these items are becoming less available at industry auctions as bankruptcy and fleet dispositions have slowed in the second half of the year.

Raw materials prices on the rise

Raw materials represent one of construction machinery manufacturers’ greatest costs, and commodity price fluctuations are passed along to manufacturers in component costs. Iron ore and steel prices are expected to rise again in 2011, as seen in the following chart. Emerging economies such as China, India and Brazil are making major investments in infrastructure and industrialization and, in such, have driven up demand for primary metals in recent years. Increases in these raw material costs and other costs associated with manufacturing equipment in the U.S. makes it difficult for manufacturers like Caterpillar, Deere and Terex to compete as margins tighten. As a result, manufacturers have implemented major cost cutting efforts and downsized workforces. Most notably was Caterpillar’s 20% downsizing announced in 2009.

DEMAND

Construction spending down

The residential, commercial and infrastructure construction markets remain soft. November 2010 total construction spending was estimated at a seasonally adjusted rate of $810.2 billion, 6% below November 2009. During the first 11 months of 2010, construction spending was 10.6% below the same period in 2009. Overall construction spending for 2010 was estimated to decline 8.3% and forecast to continue decreasing in the first half of 2011, but spending is anticipated to improve in the second half of 2011, resulting in a flat growth rate.

Residential

Despite low interest rates and government incentives, the residential construction market has continued its slump. In November 2010, privately owned housing starts were at a seasonally adjusted rate of 555,000, 5.8% below the year prior. Many analysts are projecting a glut of foreclosed homes will flood the market in 2011, likely dampening demand for new homes.

Commercial

In November 2010, the value of construction put in place for commercial property dropped to $39.089 billion, 15% lower than one year prior.

Infrastructure

The Federal government is continuing attempts to jumpstart infrastructure spending through new proposals. On September 6, 2010, the Obama Administration proposed $50 billion in new spending on improving roads, railways and runways, in addition to the $68 billion of infrastructure spending committed to in the American Investment and Recovery Act. Unfortunately, the distribution of funds is taking longer than expected and the projects are slow to develop.

International demand for equipment increasing

Global construction activity is expected to play an important role in the construction equipment industry’s future success. In the four years leading up to 2008, exports increased at an annualized rate of 20% in emerging markets such as Asia, Latin America and Eastern Europe. Caterpillar, John Deere and Terex are as well-known globally as they are in the U.S.

To achieve greater cost savings, companies continue to establish manufacturing capacity offshore and cut costs domestically. Exports are estimated to account for 40 percent of the industry’s revenue generation in 2010 (66% of Caterpillar's sales are international). Exports are expected to increase an additional 9% in 2011 with demand from China, Latin America and the Middle Eastern markets leading the way.

In North America, demand is picking up from Canada which has relieved the U.S. of some of its used equipment. This has been fueled by improvements in the Canadian housing market and building of infrastructure in specific provinces such as Saskatchewan and Manitoba.

Machinery demand forecasted to increase in 2011

U.S. construction machinery sales are expected to rise 11.6% for 2010 and forecast to grow 9.6% in 2011, according to Manfredi & Associates. These increases come after a nearly 50% decline in 2009. While this is welcome news for the industry, it will still be a while before sales return to pre-recession levels. Aging fleets and pent-up demand are driving these increases in sales. Continued increases will rely on sustained improvement in the economy and more infrastructure spending.

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About AccuVal
AccuVal provides a broad range of valuation, advisory and asset management solutions that contribute to growth or help ensure survival. We appraise the business enterprise and shareholder equity; bonds; intangibles and intellectual property; machinery and equipment; inventory; real estate and accounts receivables in over 100 industries worldwide. Learn more at www.accuval.net.