SCHAUMBURG, Ill. Heavy equipment and industrial end markets will see favorable gains in the next three to five years on the back of a booming energy sector, low-cost feedstock for industrial products, recovery in the construction markets and the need for new infrastructure, according to analyst Eli S. Lustgarten, senior vice president of Longbow Securities LLC, Cleveland.
But sluggish mining conditions and an uncertain agricultural equipment market may pose a challenge before things get better, he said.
While industrial activity picked up globally and peaked near mid-2012, global uncertainty led companies to complete major projects and approve few new programs, Lustgarten told delegates during the Metals Service Center Institutes Economic Summit in Schaumburg.
"Virtually every industrial manufacturing sector went through inventory liquidation in the second half of 2012 and the first half of 2013, led by the two sectors that most overproduced in the first half of 2012: trucks and construction equipment," he said.
From March to June this year, economic results pointed to a bottoming of inventory destocking as sluggish crane demand and weak mining markets are likely to extend through 2014, he said. "Truck recovery has been relatively sluggish with modest increases. What effectively happened is that were stuck in this replacement mode."
In the agricultural sector, demand for farm equipment will depend on global economic growth, demand and weather. While growth in 2011 and 2012 reflected global weather issues, which tightened supplies and dramatically raised prices, Lustgarten said the question will be whether the big crop potential slated for 2013-14 will increase equipment demand.
Farm cash receipts have fallen after peaking in 2011-12 and will continue to fall in 2014. With the expectation for larger crops in 2013, pressure will be placed on prices, which will mean a potential softening for new farm equipment for 2013-14, he said, and farm equipment sales in North America are expected to be flat to down 10 percent in 2014.
In the construction sector, equipment sales have largely stemmed from fleet replacement, which has been "well below" replacement levels even with current construction activity, Lustgarten said. Construction equipment sales fell some 66 percent from their peak in 2006 to a trough in mid-2009, and most construction equipment fleets aged or shrank during the downturn. Total private construction expenditures fell 45 percent from peak to trough between 2006 to 2010, and were still down some 40 percent in 2011.
"We are witnessing a bounce in construction equipment sales back towards a level more consistent with current construction activity depressed as it may be, and still 35 percent or more below prior level peaks," he said. He expects double-digit growth in light equipment demand in 2014 but a continued 5- to 10-percent decline in sales of larger equipment, led by continued soft mining demand.
Construction activity should continue to improve in 2014, driven by housing and higher spending in private nonresidential markets.
While conditions do not look favorable now, Lustgarten said, industrial end markets likely will show "modest to moderate growth" after a sluggish 12-month period.