Coming Out of the Abyss - Business Outlook
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Coming Out of the Abyss

By Eli Lustgarten

Article Date: 03-01-2009
Copyright(C) 2009 Associated Equipment Distributors. All Rights Reserved.

Construction equipment, including material handling and mining, will continue to see declines into 2010.

The absence of credit and the failure of financial institutions quickly dragged the already weakened industrial sector into full-fledged recession. Domestic manufacturing activity plummeted as industrial production turned negative, capacity utilization fell dramatically and the ISM Purchasing Manager’s Index (PMI) fell off a cliff to 36.2 in November, 32.9 in December before rising slightly to 35.6 in January 2009. More importantly, the export outlook deteriorated as the Euro-zone PMI paralleled the U.S., falling to 35.6 in November, 33.9 in December before a slight uptick to 34.3 in January.

The lynch pin of how much pain will be endured by Industrial America rests on the success of unfreezing and stabilizing the credit markets over the next several quarters. The first quarter, and most likely the first half of 2009 will be an extremely difficult period for most industrial manufacturing companies. For the near-term, virtually every end market of Industrial America is facing or will face lower demand.

It’s important not to extrapolate the results of the last two months of 2008 and early 2009. This period – impacted by the onslaught of the global recession and exacerbated by the extensive manufacturing shutdowns both here and abroad – is unlikely to be indicative of full-year 2009.

Manufacturing companies faced with involuntary inventory build-up (caused by plummeting demand) elected to accelerate the needed inventory correction into a 60- to 90-day window as opposed to a more typical six- to nine-month window of correction.

That said, the demand picture for 2009 will not be pleasant, with sales and production declines of 15 to 20 percent or more relatively commonplace in most end markets including housing, auto, trucks, global farm machinery, most energy subsectors and construction equipment, including material handling and mining.

The latest data suggests that sales of earthmoving machines were off 22 to 24 percent in 2008, with light equipment down about 24 percent and heavy equipment down 22 percent. Our forecast for 2009 anticipates a further decline of 15 to 20 percent as export sales wane under the strain of global recession and a relatively stronger dollar; overall nonresidential construction will fall 5 to 15 percent in 2009, with a similar decline likely in 2010.

Most material handling sectors will see double-digit lower demand this year including the crane sector, which now appears to be facing a 20 to 25 percent decline on 2009, possible accelerating to a 35 to 40 percent downturn in 2010.

We also expect the global recession to take its toll on construction equipment demand outside North America. European sales have softened as their economy weakened (down 24 to 30 percent) and we expect sales will decline a further 20 to 25 percent in 2009. Latin America and Rest of World sales could also fall 20 to 25 percent this year.

Even the mining sector is now feeling the effects of global recession and the plummeting of commodity prices. Latest capital expenditure data from the major mining companies suggest that capital spending in the mining sector rose more than 7 percent in 2008 to what appears to be a near-term peak of $116 billion from $108 billion in 2007 and about twice the $59 billion spent in 2004. However, recent cutbacks by major mining producers suggest 2009 mining capital spending will fall nearly 47 percent to about $62 billion and a further 16 percent in 2010 to about $52 billion.

This translates into a 20 to 25 percent drop in domestic underground mining equipment sales in 2009 and about a 15 to 20 percent decline in Rest of World sales. Mining shovel sales will possibly total 50 units in 2009 (about 2008 production) but will fall to about 45 units in 2010.

There is a light at the end of this bleak forecast for the construction equipment sector called stimulus programs. However, with all the slack capacity in the industry, it is our belief that the near-term impact of proposed spending under stimulus proposals in the U.S. and elsewhere will initially favor consumables like aggregates and steel.

Longer term, we hope that the reauthorization of the highway bill scheduled for the fall of 2009 will be the beginning of a renewed commitment to rebuild our deteriorating infrastructure – and will result in a boost to construction equipment demand in 2010 and beyond.

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