There’s 2010, and There’s the Recovery – But Do They Collide?By Eli Lustgarten
Article Date: 01-01-2010
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Even by 2012, construction equipment demand levels won’t equal ’06-’08 levels.
Virtually every industrial sectorwas under pressure in 2009.
Housing has fallen an additional 40 percent from about 900,000 starts in 2009 to somewhat over 500,000. Automotive production will likely come in between 8 and 8.5 million, down from 12.6 million in 2008, helped by the recent cash for clunkers program. Construction equipment production is down more than 50 percent as export demand wanes; nonresidential construction fell 5 percent to 15 percent in 2009 and is likely to repeat a similar pattern in 2010; and NAFTA heavy truck production looks to be 44 percent lower in 2009 to about 115,000 units from 205,000 the previous year. Even markets like farm equipment, mining and oilfield machinery, and electrical machinery, which were originally expected to hold up in the weak domestic economic environment found themselves under pressure from the recession and financial meltdown.
Government programs have been successful in generating renewed economic growth in the second half of 2009, a profile that will likely continue in 2010 and beyond. No matter how strong the reported economic statistics get, the industrial reality is that we have dug ourselves a very deep hole to climb out of in 2010. Manufacturing capacity utilization is currently 67.6 percent compared to a more normal 78 to 80 percent. Virtually every industrial sector is currently in an “over-capacity” position globally!
We expect a slow industrial recovery over the next six to 12 months. There is minimal need for any capital equipment expansion in 2010, as industry attempts to absorb the excess capacity. Production increases will mostly be related to the end of inventory liquidation as production levels more closely match end market sales. Smaller, lighter equipment is likely to outperform heavy equipment, which could decline through at least the first half, if not all of 2010.
We foresee 2011 into 2012 to be a slow climb back toward a “new normal,” a level of demand that we perceive to be lower than the end market demand realized in 2006 to 2008.
The environment for construction activity in 2010 and 2011 will improve over 2009 but will be less than robust. The key is financing availability; financial institutions will likely to be reluctant to rapidly expand availability.
Automotive demand will likely bounce 25 percent in 2010 to somewhat over 10 million units. Auto is unlikely to return quickly to the 15 million to 16 million units of NAFTA production that prevailed for most of the past decade to support what was 16 million to 17 million annual car sales. Perhaps 12 to 14 million unit production will be the new norm.
Housing starts will likely jump 50 percent in 2010 to perhaps 750,000 to 800,000 units or more and double in the next two to three years to more than one million units. However, the new norm may be 1.3 million to 1.6 million not 2 million over the next few years, with cautious lenders keeping the sector in restraint.
Nonresidential construction markets will remain difficult well into, if not through 2010, as financing institutions continue to be reluctant to provide capital to this sector. This is the one end market that may benefit from government stimulus money to help bring about stability over the next 12 to 18 months.
Heavy class 8 truck demand is likely to return toward a more normal level of around 200,000 units as early as 2011 with sustained economic growth, as the impact of excess capacity and the new, tighter 2010 emissions regulations pass. However, prior level peak demand of well over 300,000 units is unlikely to be realized until we approach the next emissions cycle.
The worst is clearly over for now for Industrial America. Most companies will have to readjust to a lower level of activity over the next several years, but the opportunity for improving profitability is still excellent in what is likely a lower interest rate, lower inflation environment, at least for the foreseeable future.
Construction equipment end market demand looks relatively flat to up modestly in F2010. Production, however, will increase 15 percent to 20 percent or more due to the end of inventory liquidation, which will allow OEMs to produce at or near retail demand.
Construction equipment, engines and turbines, and other heavy equipment face a slow recovery through 2012 to levels that are likely below those seen in 2006 to 2008.
Mining equipment may be the one heavy equipment market that begins to show recovery by 2011, as commodity prices begin to rebound, helped by China-led global growth and the weak U.S. dollar.
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