The New Challenges Unfolding For Domestic DistributorsBy Eli Lustgarten
Article Date: 08-01-2010
Copyright(C) 2010 Associated Equipment Distributors. All Rights Reserved.
The coming Tier-4 era in 2011 is one possible explanation for the current soft market in used equipment.
Just as some activity begins to improve, as reported by Reed Construction Data and McGraw-Hill in this issue, a new set of challenges have formed on the horizon. The Associated General Contractors of America (AGC) reports that many state Departments of Transportation (DOT) are projecting 30 to 50 percent potential declines in their highway construction budgets next year. Recent spending levels for many DOTs have been at record levels as a result of federal stimulus funding and the lagging benefit from prior year funding initiatives. The huge potential spending cutbacks reflect federal stimulus money that is starting to wane, state budgets that are under tremendous pressure from the weak domestic economy, and no new highway bill, probably at least until 2011. State DOT spending may be forced to focus on construction maintenance and rehabilitation rather than expansion projects.
Further, housing has taken another turn for the worse with the expiration of the recent first-time homebuyers’ tax credit program. June 2010 housing starts of 549,000 were 5 percent below May’s revised 578,000 and the lowest level in eight months. The National Association of Home Builders (NAHB) reports that home builder sentiment in July is the lowest since April 2009 and the University of Michigan’s July 2010 index of consumer sentiment has taken a turn downward to its lowest level in 11 months. The NAHB’s most recent forecast of housing starts for 2010 of 656,000, up from 554,000 in 2009, is no longer viewed as extremely conservative.
The construction equipment industry’s reaction has been one of extreme caution. The only strength in demand in 2010 is outside the U.S., primarily in emerging markets. Our most recent forecast suggests worldwide demand for light construction equipment will still likely be up as much as 25 percent, driven by a 65 percent gain in Latin America, 35 percent increases in rest of world (ROW) led by Asia/China, with NA up perhaps 8 percent, and Europe at best up 5 percent. Heavy equipment demand may increase as much as 35 percent, led again by Latin America (up 65 percent) and ROW (Asia/China up 45 percent). This has led to a surge in export demand in the U.S., which could be up as much as 65 percent this year over 2009. Domestic and European demand continues to languish at near flat.
The soft market conditions have even spilled over into the used equipment market. Richie Bros. recently guided down their projections for gross auction proceeds by up to 15 percent to reflect that owners and creditors are showing a reluctance to trade/auction inventory even though the equipment may be idle. Currently, there are too many contractors bidding on the same jobs and margins are razor thin, cutting cash available to purchase new/used equipment.
It’s possible that the reluctance to sell excess idle equipment at distressed prices reflects the growing recognition of the potential for double-digit Tier 4 price increases next year. There is likely going to be a shortage of newer, low-hour machinery due to the sharp decline in new equipment releases in 2008-’09. Owners may now be sitting on current assets that are going to be heavily sought after because of Tier 4 pricing and complexity of the new off-road Tier-4 engines.
What should a dealer do? First they need to recognize that construction spending will get marginally better in the U.S. in the second half of this year and continue to grow in 2011 with increased activity in both residential and nonresidential markets, albeit at well below normal rate. New Tier 4 machines will be phased in beginning in 2011 at much higher prices. The result will strengthen used equipment pricing as 2010 progresses and into 2011, enabling dealers to manage and right-size their existing fleets at much more attractive prices.
Most OEMs, meanwhile, will continue to focus on export markets, suggesting that new equipment availability to domestic dealers will continue to be difficult in 2010. However, with the potential slowing of global growth, including China, and elections in Brazil next year, dealers may want to take advantage of new equipment that may become available later in 2010 at prices far less than the 2011 model to enhance profitability as the construction sector begins to show some signs of life next year.
Editor’s Note: Hear Eli Lustgarten present his market analysis and forecast at the AED/Lawson Executive Forum in Chicago on Sept. 17. Attendees will also hear experts discuss the dealer’s role and opportunities associated with Tier-4 regulations. See details at www.aednet.org/execforum.
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