July 10, 2014

Feelings soften after strong ConExpo-Con/Agg

Not too long ago the vision was a kissing booth. Now some are not sure what they are looking at—like those witnessing a Man of Many Faces carnival act. Some contractors continue to smile through the equipment acquisitions, while others are taking on the remainder of 2014 with more of a straight face.

In March at ConExpo-Con/Agg 2014, many manufacturers had trouble dealing with the purchasing traffic love. However, since then the market has been dipped in ice cold water.

“[At ConExpo], to the surprise of a couple of major equipment suppliers they weren’t quite ready to take the orders at the pace people were walking up to the booth,” Al Cervero, vice president of the Construction Equipment Sector at the Association of Equipment Manufacturers (AEM), told Roads & Bridges magazine. “We got a much stronger acquisition feel, but I would say now it continues to be slow growth.”

Equipment movement in North America appears to be decent, but according to Cervero action overseas and over the border has fallen off course.

AEM reported in June that total U.S. construction machinery exports for first quarter 2014 totaled a little more than $4.2 billion, compared with $5.287 billion in the opening months of 2013, a drop of 18.8%.

Nearly all world regions recorded high single-digit or double-digit declines, except Africa, which showed double-digit growth in exports.

Countries showing the largest declines were:

Australia/Oceana (41%);
Europe (34%);
South America (33.9%);
Central America (26.7%);
Canada (8.5%); and
Asia (7.2%).

“Outside of North America, companies are looking at [the rest of 2014] less optimistically,” said Cervero.

Inside the U.S., it really depends on what section of the marketplace you are looking at. The natural gas/energy industry is showing strong growth, while the agriculture world is experiencing a bit of a slowdown. Residential construction is showing slow growth, as is the highway/bridge industry.

According to Cervero, about 30% of major contractors are maintaining their current fleet, while 40% are looking to increase their fleet within the next 12 months, which could make 2015 a breakout year.

When Roads & Bridges asked contractors what percentage of their fleet’s equipment and trucks do they expect to replace this year, about half said 0%. Road and bridge builders were then asked if they believe the cost of maintaining their fleet will be more in 2014 than it was in 2013, and 56% said yes, with about 30% of those who said yes believing the price to hold the status quo will be 6-10% higher this year.

On-highway trucks continue to be strong on the acquisition side. More than 32% of R&B survey respondents say they plan on purchasing trucks before 2014 comes to a close. Light equipment and excavators (full and mini) also appear to be in high demand, with 20.6% saying they will buy new. Attachments (15%), skid-steer loaders (13.2%), loader backhoes (12.5%) and wheel loaders (11.4%) also were expected to be the top sellers over the final six months of the year.

The conversion over to Tier IV final engines continues to be more of a deterrent in terms of manufacturing sales.

“It makes folks think about whether they should invest $1 million in a piece of equipment,” Cervero said.

Only 24% of R&B contractors have indicated they plan on purchasing Tier IV machines, while 26% say they plan on renting machines when necessary. Another 16.6% plan on adding after-treatment devices or will retrofit existing machines.

With all the uncertainty surrounding new equipment acquisitions, rental continues to be the go-to option.

According to a GE Capital, Equipment Finance survey conducted in late May, construction equipment dealers believe the rental segment will grow about 12% in 2014.

Additional findings included:
96% of respondents are optimistic that rentals will remain strong through the rest of the year;
76% expect equipment utilization to grow, while 24% expect it to stay the same this year; and
68% said the size of their rental fleet grew in the first quarter of 2014 versus the prior year.

“The rental fleets, their capital expenditure spending is higher than what people thought because they did an awfully lot of cap ex spending prior to ConExpo, and I don’t think people were expecting cap ex spending in 2014 after seeing what they did in 2012 and 2013,” said Cervero. “It continues to be a strong area for the OEMs.”

Still good—or very good

Overall, manufacturers and contractors in general continue to find themselves in the area of good to very good.

When asked to rate how they expect 2014 will play out as a business year, 47.2% of contractors say it will be a good year, with another 23% indicating it will be a very good year. Only 4% believe business will be poor. As far as the overall health of their firm today, 46.3% say it is good and 30.2% say it is very good.

Companies like Cummins and Caterpillar also are holding their own. In late April, Cummins announced a first quarter revenue of $4.4 billion, marking a 12% increase compared with the same quarter in 2013. The increase was driven by a stronger demand in on-highway markets and distributor acquisitions in North America. Revenues in North America increased 25%, while international sales were flat.

Caterpillar also brightened its expectations in 2014. While the outlook for sales and revenues remains unchanged, the Peoria, Ill.-based giant expects Construction Industries’ sales will increase about 10% from 2013, and sales for Energy and Transportation will rise 5% compared with last year.

One issue that has the power to swing the market one way or the other is the expiring highway funding bill, MAP-21. With the Highway Trust Fund approaching dangerously low levels, many in the road and bridge industry fear some projects may be stalled or deleted later this summer.

On June 20, House Speaker John Boehner (R-Ohio) said a nine- or 12-month spending bill might be in order, while those on the Senate side hope to pass a multiyear measure. The House Transportation & Infrastructure Committee has been relatively quiet on its solution.

“We are hearing that we are going to have an extension to mid next year,” said Cervero. “The highway bill is obviously a big deal.” R&B

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