MID-YEAR EQUIPMENT REPORT: What’s on the line?

Remainder of 2013 looks foggy for equipment sector

Article July 12, 2013
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Mike Quirk’s line of sight is shallow these days, and who knows what game will suddenly come into view.

It could be something along the lines of Don’t Break the Ice, which is a bit of a contrast to business conditions a year ago, when the rental business was restocking lots across the country. Today, political instability in Washington, the amount of debt, the tax situation and the effects of Obamacare have turned that line into a tightrope. One wrong move, however slight, could lead to a free fall.

“I think anything could happen [during the second half of 2013], and I did not feel that way last year,” Quirk, vice president at Wagner Equipment Co., a Caterpillar dealer in Aurora, Colo., told ROADS & BRIDGES. “I think there is more concern this year than there was last year.

“If we had a line of sight to what we really had a hold of I think American business will deal with it and live with the consequences of capitalism, but when you don’t know you kind of sit there and you play it close to the vest.”

Wagner Equipment is situated in a business environment that branches off into three key areas—Colorado, New Mexico and Texas. Each region is playing out a little differently in terms of market conditions. Like many in the industry, Wagner learned a few years ago that testing the water in different streams is far better than sitting in one pool and waiting for that next wave. The mining, oil and gas markets have picked up for Wagner, while the highway and residential side of the business continue to flirt with recovery.

“We have a line of sight that is 90 to 100 days out rather than 18 to 24 months, and when you have a short line of sight like that rental and product support generally are the beneficiary because people either patch things or they rent things. They don’t make long-term commitments,” said Quirk.

In fact, according to Quirk, product support has recovered to pre-recession levels, and there have been positive signs in the equipment sales and with rentals, but business is a little off from 2012. Fleets are still carrying more rust than shine, partly due to the economy and some insecurity about Tier IV engines. However, Quirk said much of the anxiety over the new technology has subsided, and dealers located in areas where tight emission standards are being policed by local governments are seeing a spike in buying activity.

“We don’t have that in our territory, so that’s not driving people to the doors to buy new equipment,” Quirk said. “I think people would like to buy, but they have not upgraded their fleet.”

Good, not great
A recent ROADS & BRIDGES survey on current market conditions shows not much has changed over the course of the last year and that businesses are still in pretty good shape.
In 2012, just over 38% said it was going to be a good year for their company, and over 54% labeled their health as either good or very good. When asked about performance over the last two quarters, over 46% said it was good or excellent, while 38.4% said it was just average. Looking at the second half of 2012, just over 35% expected to see a surge, while 49.3% predicted the market would remain flat.

When it came to purchasing equipment over the final stretch of the year, 38.9% said they would not be buying anything. On-highway trucks (24.5%), light equipment (22.7%) and excavators (20.1%) were the next three highest responses.

When polled this May, just under 36% indicated 2013 was going to be a solid one, while 20.9% went a step higher with a “very good” response. Just under 30% said it was going to be an average year. The last two quarters have been good for 40% of the respondents, with another 5.9% claiming it was excellent. About 34% said it was average. As for the rest of 2013, more remain optimistic compared with 2012, with 42.7% hoping for stronger numbers compared with 48.6% of flat thinkers.

When asked what type of equipment they would be purchasing for the remainder of the year, none was again the top answer (33.3%) followed by excavators (27.6%) light equipment (23.6%) and on-highway trucks (20.1%).

Still a little unsure
Caterpillar and John Deere have launched hybrid machines over the last six months, but like the unveiling of Tier IV technology, hesitation might hinder the selling numbers at the onset. According to the ROADS & BRIDGES survey, a determined 67.2% said they were unsure about the performance of hybrids, while just 16.1% said they looked to purchase/rent the machines as they become available.

“Our experience with hybrids has been great,” said Quirk. “The reliability is great, the fuel savings and the fact they can do more work with less horsepower have been promising. That kind of efficiency is attractive to people, and I hope it is more the wave of the future.”

Compressed natural gas also is showing signs of becoming a factor in the marketplace, and R&B respondents appeared to be more comfortable with the move compared with hybrids. Just under 42% said compressed natural gas looked promising, with 46.2% unsure.

“I think it is cleaner on an engine as far as the life of an engine,” said Quirk. “I would embrace it.

“You look at that situation and I think the people would race to put in fueling stations, race to develop technology to fill up at your home, but because they don’t know long term what kind of obstacles will be put up against it people look for other areas that are more safe to spend their development money.”

Light on spending cash
With deterioration continuing, the road and bridge industry appears to be a solid investment, but activity is still sputtering in most areas. According to the American Road & Transportation Builders Association (ARTBA), the value of construction put in place through March 2013 is $7.3 billion in bridgework and $8.38 billion in new pavement. A record number of spans were either repaired or built in 2012, and that mark is being challenged through the first three months of this year, but pavement performance is down—and contract awards in both areas through May 2013 have dropped (2.5% for bridges and tunnels and about 0.5% for highways).

Bad weather might account for the relatively flat start to the construction season, but ARTBA originally forecasted about $1 billion more in activity on the pavement side.

“It’s something that can be made up during the course of the year, but it is a little bit weaker than we would like to see,” Alison Premo Black, chief economist for ARTBA, told ROADS & BRIDGES.

Other pressures continue to trouble the average transportation contractor as well. The competition to land work continues to be heavy, according to ARTBA’s most recent quarterly report (ending March 31, 2013). “There is still significant pricing pressure in the market and not enough work,” wrote one ARTBA survey responder.

When asked to compare work performed in the first quarter of 2012 with the first quarter of 2013, 43% of ARTBA’s audience said it was down from a year ago, and another 42% said the backlog of construction work is down.

Capital spending also has been pulled back over the last 12 months, as 53% of contractors noted a decline. Profit margins took a hit too during the first three months of 2013, with 48% recording lower numbers.

With less cash to buy new equipment, auction and second-hand markets continue to see record-breaking activity, and the trend is not expected to diminish anytime soon.

“I think it is still a challenging market environment, and we have certainly seen that a lot of contractors have put off some of their equipment and capital purchase decisions,” said Premo Black. R&B

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