A combination of declining
export opportunities and excessive inventories could result in
somewhat lower growth in 2013 than in the past few years for
U.S. heavy equipment manufacturers. Just how much lower,
however, depends on the type of equipment, with agricultural
holding up well despite last years drought but
construction and mining experiencing difficulty.
Such an outlook follows a
somewhat schizophrenic 2012--one that Jeff Simons, vice
president of marketing and business development at Birmingham,
Ala.-based ONeal Industries Inc., called a tale of
two halves, with manufacturers of all types of yellow
goods hitting it out of the park early in the year.
While shipment levels didnt quite match those prior to
the recession, they were quite strong.
After a great first half,
the economies around the world began to slow around mid-year,
and as a result dealer sales to end-users began to flatten
out, Mike DeWalt, corporate controller and director of
investor relations at Peoria, Ill.-based Caterpillar Inc.,
recently told investors. We found ourselves with
inventory that was too high, and our dealers also found
themselves with too much inventory. As a result, dealers slowed
orders, and in the third quarter we began the process of
scaling back production.
was not alone in seeing a buildup in heavy equipment inventory.
Marie Ziegler, deputy financial officer at Deere & Co.,
Moline, Ill., told investors that Deere also has been
really tweaking its inventories, especially on the
This isnt surprising.
Whenever theres economic uncertainty, it can have a
negative impact on the market, Dean Barley, vice
president and general manager of the construction Americas and
global aftermarket division of Terex Corp., Westport, Conn.,
told AMM. He said this is especially true when the
economy is stabilizing and in a fragile recovery mode after
digging itself out of a deep recession.
The fourth quarter of last year
was especially tough for the heavy equipment sector, with some
of that weakness spilling over into the first part of 2013,
according to Eli S. Lustgarten, senior vice president of
Longbow Securities LLC, Cleveland. While an inventory
liquidation continues, the current market is an improvement
over the fourth quarter of 2012, with some strength in sales
but a lag in production, he said. On the whole, 2013 will
be a transition year, with the performance in the heavy goods
sector likely to be flat to modestly down, partly because of
slower economic growth but also because of global
Exports have a major impact on
how well the heavy equipment sector performs because about 45
percent of all North American heavy equipment was exported in
the last couple of years, Christopher Plummer, managing
director of Metal Strategies Inc., West Chester, Pa., said.
That is one reason why (heavy equipment
manufacturers) inventories had built up so much. It is
the worldwide effect--the slowing of economic growth in China,
the European recession, and the weak economies in Brazil and
India, as well as the softening of economic activity in the
Because of continued destocking,
Plummer said that overall the first half of 2013 could be
weaker than the first half of 2012 for yellow goods, both in
North America and worldwide. But as I believe that the
inventory problem will largely be cleared out by the second
quarter, growth should accelerate in the second half, resulting
in an average of 5-percent year-on-year growth in 2013,
Agricultural equipment is
holding up especially well due to high commodity prices,
according to Charles Yengst, president of Yengst Associates
Inc., Wilton, Conn. These are the type of times that
Deere has estimated that the
price of corn will be $7 per bushel in 2012-13, up from $6.22
in 2011-12, while wheat will increase to $8 per bushel from
$7.24 and soybeans to $14 per bushel from $12.50.
Yengst said this has resulted in
stronger income for farmers, which is a big factor in their
decision to purchase tractors and combines. And while it was
expected that last years drought would hurt farmers, it
hasnt been the case. He said that some farms were
unaffected by the drought, so they benefited from the resulting
crop shortage which forced prices up, and those farmers who
were affected received insurance payments or other help from
the government and still managed.
demographics--specifically, the growing middle class in many
developing nations--continue to be factors in the sale of
agricultural equipment: The more meat they eat, the more feed
that is needed for livestock.
On the flip side, Plummer said
that of all the heavy equipment sectors, mining equipment has
been the most affected by what is happening elsewhere in the
world, especially in China and Europe.
We had very large orders
for mining equipment throughout much of 2011 and through almost
the entire first half of 2012. But thats when the
sentiment changed, Caterpillar chairman and chief
executive officer Douglas R. Oberhelman said. While orders on
hand remained quite significant, the softening of the Chinese
economy over the past six months has led to customers easing
off on orders, he said. It did start to pick up a little
bit late in the fourth quarter, but its not what
wed consider to be at a sustainable level.
Overall, coal mining--and, to a
lesser degree, iron ore mining--has been extremely soft in
North America, Lustgarten said, with certain companies holding
off on a number of projects as the mining industry enters a
Simons said that demand for
thermal coal in particular has been hit hard by environmental
concerns, as well as the Obama administrations push for
alternative energy sources.
Michael W. Sutherlin, president
and chief executive officer of Joy Global Inc. and chief
executive officer of Joy Mining Machinery, said at a recent
industry conference that a lot of thermal coal production has
already been taken out, with most of the switch having occurred
last April, when natural gas prices were below $2 per million
British thermal units. Right now, we see it
stabilizing, he said, with much of the thermal coal
thats still being produced in central Appalachia finding
a home in export markets.
Despite its recent sharp but
temporary dropoff, mining has the strongest potential for
long-term growth for the heavy equipment sector, Plummer
Construction equipment was hit
hard by economic woes over the past four years, during which
some equipment markets dropped by as much as 90 percent,
according to Barley. However, replacing aging fleets and
increasing building permits have combined to result in a
resurgence in many types of construction equipment sales. For
Terex, Barley said, this includes its front-discharge mixer
truck line, articulated trucks, compact track loaders, wheel
loaders, skid steers and crawler excavators.
It isnt that the
construction market is booming, however. Building permits were
up 28.8 percent year on year in December, according to the U.S.
Department of Housing and Urban Development, which isnt
all that strong. Yengst noted that U.S. housing starts had
fallen 75 percent to 500,000 in 2009, down from a peak of 2
million in 2007. While they have since risen to 750,000 to
850,000 units and could increase further to slightly above
900,000 this year due to low interest rates and pent-up demand,
they will remain about 55 percent below peak levels.
despite having already bottomed out, is seeing just modest
gains, which Plummer said is to be expected, given that the
sector historically trails housing recoveries by about 18 to 24
Equipment sales also have been
trailing positive economic trends, for several reasons. One is
a weakening in exports, especially to China, Europe and Japan.
This has a big effect, Plummer said, noting that China accounts
for about 50 percent of the construction equipment consumed
And while the domestic market is
growing, it is primarily seen at equipment rental companies.
Without that business, the equipment manufacturers would
be losing money, Yengst said, explaining that contractors
dont have a long-term vision of where their market is
going so they dont want to risk buying new equipment,
even though they might have sold some of their older equipment
during the downturn. They no longer have three or four
jobs lined up in a row, but only have one going at a time, and
they dont want to have equipment just sit in their
yards, he said.
Yengst said he doesnt see
the mix shifting back to direct sales until there is a more
significant pickup in commercial and infrastructure
We expect the construction
equipment market to continue to stabilize and rebound as
it slowly rises from its long, deep recession, Barley said,
with 2013 being a setup year for 2014 and beyond, when a full
recovery should start to take shape.