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Lighter projections for heavy equipment market this year

Feb 28, 2014 | 08:00 PM | Myra Pinkham

Tags  Longbow Sercurities LLC, Eli S. Lustgarten, heavy equipment, Charles Yengst, Yengst Associates Inc., Christopher Plummer, Metal Strategies Inc., Edward L. Doheny II Joy Global Inc.

The heavy equipment market is expected to remain relatively soft in 2014, with the farm sector taking a breather and mining equipment demand remaining weak, offset somewhat by anticipated modest gains in the construction and forestry sectors.

However, the long-term outlook for heavy equipment continues to be quite strong as economic conditions in many countries--especially developing countries--improve, resulting in the need to construct homes, businesses and highways as well as mining and farming assets. Eli S. Lustgarten, senior vice president of Cleveland-based Longbow Securities LLC, said the big question will be how this translates to the need for new off-road equipment, especially over the next year or so.

The heavy equipment sector actually experienced a quicker recovery from the 2008 financial crisis compared with other industries and continued to do quite well through 2012, according to Charles Yengst, president of Yengst Associates Inc., Wilton, Conn. However, Lustgarten said it slowed down for much of last year, becoming one of the weaker parts of the U.S. economy.

While heavy equipment remains a somewhat mixed bag, with each sector having its own set of drivers, the market is expected to be flat to slightly up in 2014 and there are indications that greater improvement will be seen in 2015, Yengst said. “By then we should see better economic improvement both in the United States and globally,” which should lead to improved demand for farm and construction equipment as well as mining equipment, which has been the poorest-performing heavy equipment sector.

With its major end-use sectors (coal, iron ore and copper) showing slower growth in the past 18 to 24 months and declining profits, mining equipment production fell 22.6 percent worldwide and 9.3 percent in North America in 2013 and is expected to dip 8.7 percent worldwide and in North America this year, according to Christopher Plummer, managing director of West Chester, Pa.-based Metal Strategies Inc.

“Starting in 2012, we saw a shift in customer behavior in capital expenditures as years of investment in additional production capacity finally caught up with demand,” Edward L. Doheny II, president and chief executive officer of Milwaukee-based mining equipment maker Joy Global Inc., said during the company’s fourth-quarter earnings conference call. This led to a supply surplus and commodity pricing declines of up to 30 percent, he said, which resulted in increased downward pressure on mining companies’ cash flow.

Frank Manfredi, president of Manfredi & Associates Inc., the Mundelein, Ill., publisher of the Machinery Outlook newsletter, said that many major mining companies--including Anglo American Plc, BHP Billiton Plc, Glencore Xstrata Plc and Rio Tinto Plc--experienced management changes in the past year and have curtailed spending on new projects.

Demand for mining equipment, especially related to coal mining, “is probably as dreary of an outlook that we have ever seen and one that could continue to be so through as late as 2016,” said Jeff Simons, president and chief executive officer of Brighton, Colo.-based O’Neal Flat Rolled Metals.

That is partly due to coal becoming more expensive to remove from the ground than some alternative energy sources, particularly natural gas, which has become cheaper because of new gas drilling technologies such as hydraulic fracturing, according to James D. Hoffman, senior vice president of operations at Los Angeles-based Reliance Steel & Aluminum Co.

Lustgarten said utility companies are looking for alternatives to coal due to the environmental implications and the widespread impression that the Obama administration does not want to see any more coal plants built, so many are frequently turning to natural gas, which is currently in overabundant supply.

There are some early indications that the mining equipment sector is starting to stabilize, given some modest improvement in the aftermarket beginning in the second half of 2013, Plummer said. Nevertheless, 2014 is already set to be a challenging year for mining equipment. “The first noticeable signs of recovery are not likely to be until 2015, coinciding with economic activity,” he said, predicting that global aftermarket production will fall another 3.1 percent this year after declining 12.6 percent in 2013, with original equipment production dipping 19.2 percent after a 36.1-percent decline last year.

Meanwhile, it appears the farm equipment market has peaked after three or four good years. “Last year was the fourth year in a row that farm equipment production grew by a low double-digit growth rate, but this year it appears as if it will take a pause,” Manfredi said.

Moline, Ill.-based Deere & Co. noted in its fourth-quarter earnings report that it expects industry sales of agricultural machinery in the United States and Canada to be down 5 to 10 percent in 2014, with the decline mainly reflecting lower sales of such large equipment as high-horsepower tractors and combines. Deere said that sales in the European Union are expected to fall 5 percent due to lower commodity prices and farm incomes, South American sales of tractors and combines are projected to be down 5 to 10 percent and sales in the Commonwealth of Independent States also are expected to be down slightly, while Asian sales are projected to be up slightly this year.

A decline in farm income is the biggest driver for this pause in the United States, Yengst said, noting that farm commodity prices and government subsidies have dropped modestly. “But I don’t think that it is anything more than just a transition period,” he said, forecasting that demand will pick up in 2015 due to improved global economic conditions.

While production of construction equipment fell 4.8 percent globally and 3.6 percent in North America in 2013, Plummer expects production to increase 9.8 percent globally and 7.6 percent in North America this year due to improved economic conditions. Similarly, he said production of forestry equipment, which is highly influenced by the construction market--especially residential--is expected to increase 10.2 percent globally and 8.1 percent in North America in 2014 after falling 4.5 percent globally and 4.8 percent in North America last year.

Deere seemed to support this view, noting that it expects its global sales of construction and forestry equipment to increase by about 10 percent in 2014 after declining around 8 percent last year.

When all sectors are factored together, heavy equipment production likely will be flat to up slightly, Manfredi said. “It won’t be a bad year. If the government boosts spending for roads and bridges it would help, but I don’t think that is in the cards.”

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