OEM Report: Heavy Equipment/Construction
Friday | 03 September, 2010 | 6:14 am

Digging out of a hole

Written by By Lauren Duensing

August 2010 - Although building won’t return to pre-crash levels for quite some time, the market’s on the mend. According to a survey published at the end of June by McGraw-Hill Construction in Engineering News-Record magazine, "When assessing the construction market, 53 percent of respondents say the current construction market is in decline, 36 percent believe it has stabilized and 11 percent believe it’s improving. However, survey respondents expect the picture to be different in 12 to 18 months, with 50 percent believing the construction market will be improving and another 39 percent believing it will stabilize in 2011."

And, despite a drop in housing starts by a more-than-forecast 5 percent in June, permits for new construction rose by 2.1 percent.

Juergen Gieske, vice president, crane and component sales, for Konecranes, Springfield, Ohio, a lifting-equipment manufacturer, foresees a flat to slight increase in the company’s business. "With unemployment, or more accurately, underemployment still prevalent at high rates, we should not expect to see consumers spending, and, as such, if we don’t have people buying, there is not as much for an industry to produce and, hence, a stagnant market with only slight growth. There simply isn’t as much demand for steel, paper and other commodities to warrant much expansion or growth."

However, Gieske notes, "the market has improved from 2008 and 2009 booking levels. ... Steel has benefited from some distribution restocking, and stimulus money has trickled in to the equation, as well."

"Equipment markets are showing some signs of improvement after declines in the 50 percent range during the recession," says Dennis Slater, president of the Association of Equipment Manufacturers, Milwaukee, a trade association for manufacturers of equipment and services used in the agriculture, construction, forestry, mining and utility industries. "Although business is better than a year ago, it is still a very fragile recovery for the entire economy. Demand for farm machinery is expected to be stronger than for construction equipment, helped by slightly higher commodity prices, driven in part by the strong demand for export of these goods. The housing market remains weak, and significant public-works funding is uncertain. Export demand will continue to play an important role in the recovery, especially equipment sales to emerging markets."

Quarterly results are beginning to reflect this market improvement. In late July, Caterpillar Inc., Peoria, Ill., reported second-quarter profits up 91 percent over the same period last year and raised its 2010 outlook for sales, revenues and profit.

"We are very pleased to increase our outlook for 2010," Caterpillar CEO Doug Oberhelman said in a press release. "It reflects an increase in sales and revenue and a more significant increase in profit--a result of our continuing focus on cost management and profit improvement. While there are significant economic concerns around the world that we are watching closely, orders have continued to outpace our shipments, and we expect to increase production in the second half of the year."

New markets, new products
To keep improving results, many manufacturers are looking at a variety of market strategies. "We already participate in every market segment," says Gieske. "We do, however, migrate toward those market segments that are more active than others."

"We continue to be very positive about the longer-term prospects for many of the industries we serve, like mining, energy, infrastructure, electric power and rail," Oberhelman said in a release. "This year, we have made several announcements related to increasing capacity and expanding our lineup of products and services."

These include a new excavator facility to increase production capacity in the United States; an agreement to acquire Electro-Motive Diesel, which has the largest installed base of diesel-electric locomotives in the world; a multiyear investment of nearly $700 million supporting mining customers, including a full line of mining shovels and capacity expansion for mining trucks made in the United States and India; a 400 percent increase in excavator production capacity over the next several years in Xuzhou, China, and a new facility for small-wheel loader and backhoe loader manufacturing in Brazil.

"Global trade has been a significant source of equipment-industry expansion in recent years, and many economies are now rebounding faster than the U.S.," Slater says. "Exports have been a buoy for the construction-equipment industry as U.S. business plummeted during the recession and industry unemployment was double the national average. And in 2009, due to reliance on exports, the value of exported agricultural machinery and industrial equipment for the U.S. was at approximately 30 percent of U.S. production."

He points out, however, "economic conditions remain challenging for many countries. Europe is a major trading partner for the United States, certainly for both construction and agriculture equipment. The negative effect of slower demand on exports could influence the overall strength of manufacturing."

World needs farm commodities
Global business conditions also are affecting the agriculture industry. For the United States, net farm income, which the global recession affected greatly, will be up almost 12 percent over 2009, according to the U.S. Department of Agriculture Economic Research Service.

CNH Global N.V., Burr Ridge, Ill., reported a 10.7 percent increase in net sales in the second quarter compared with the same period in 2009. It attributes the increase to positive performance in the Americas and rest-of-world markets, which offset difficult economic conditions in Western and Eastern Europe. For the future, CNH pointed out the company "anticipates that the global agriculture equipment markets will be flat in 2010," but its outlook for global construction-equipment markets is an increase of 25 percent to 30 percent in 2010.

The company pointed out in the results, "worldwide agriculture industry retail unit sales decreased 4 percent compared to the second quarter of 2009. Global tractor sales fell 4 percent and global combine sales fell 6 percent for the quarter. North American markets rose 3 percent, with tractors up 3 percent and combine sales stable as the outlook for net farm income supported continued strong demand in the large cash crop segments. Strong commodity prices and the continuation of government support programs drove demand in Latin America, where tractor sales rose 39 percent and combines were up 41 percent. Difficult economic conditions drove the decline in Western Europe, with industry sales dropping 17 percent for the quarter, with tractor sales down 16 percent and combines down 35 percent. Rest-of-world markets were down 7 percent, with a drop in tractor sales of 7 percent and a rise in combine sales of 10 percent."

In May, Moline, Ill.-based Deere & Co. reported second-quarter income climbed 16 percent on a 6 percent gain in net sales and revenues over the same period last year. Samuel R. Allen, chairman and CEO, pointed out in a release that sales of large farm machinery, particularly in the United States and Canada, are making a significant impact on the company’s performance, but construction and forestry shipments are rebounding from historic lows.

Healthy farm cash receipts, solid commodity prices and low interest rates will support an increase in farm-machinery sales in the United States and Canada, according to Deere & Co.

"Industry farm-machinery sales in the United States and Canada now are forecast to be up 5 to 10 percent for the year. In other parts of the world, industry sales in Western Europe are forecast to decline 10 to 15 percent for the year due to general weakness in the livestock, dairy and grain sectors. High levels of used equipment also are weighing on Western European markets. Sales in Central Europe and the Commonwealth of Independent States are expected to remain under pressure as a result of challenging economic conditions. In South America, industry sales are projected to increase by about 25 percent due mainly to improvement in the key Brazilian and Argentinean markets. Conditions in Brazil are receiving support from favorable prices for soybeans and sugarcane and from attractive government-supported financing. The farm economy in Argentina is benefiting from commodity prices and a return to more normal weather conditions," according to Deere & Co.

Short-term and long-term funding
Despite the promising infrastructure markets overseas and a brief bump in U.S. numbers, government funding and policy decisions will be critical to the future success of the heavy-equipment market.

Even after making deep spending cuts, states continue to face large budget gaps. Through July, at least 45 states have reduced services to their residents, and more than 30 have raised taxes to some degree due to budget shortfalls, according to the Center on Budget and Policy Priorities, Washington, D.C., which examines the short- and long-term impacts of proposed policies on the health of the economy and the soundness of federal and state budgets.

And, as of press time, stimulus dollars aren’t bridging the gap completely. The American Recovery and Reinvestment Act of 2009 has paid out 77 percent of allotted tax benefits; 46 percent of contracts, grants and loans; and 62 percent of entitlements. However, the United States’ D-rated infrastructure is in desperate need of a long-term solution.

The stimulus has made a difference in construction spending, "but Congress needs to provide long-term funding for transportation and water projects to ensure further economic growth," Ken Simonson, chief economist for The Associated General Contractors of America, pointed out in a press release.

He also said it’s important "not to let funding lapse for highway, transit and airport construction funding. Congress and the White House need to make these programs a priority, along with long-term funding for drinking water, wastewater and waterways."

"Tight state budgets will negatively affect construction machinery manufacturing because public works construction accounts for a significant amount of construction-equipment business," Slater says. "We face an uphill battle to get adequate federal transportation funding legislation enacted. It’s been 10 months since the last highway bill expired. We haven’t seen much progress, and since this is an election year, we most likely will not see any action until after November. Without longer-term funding certainty, state and local governments can’t adequately plan projects. It’s also difficult for our equipment customers to make capital investments without the certainty of long-term funding. The administration has been touting the effects of stimulus funding, but a fully funded, long-term bill will significantly increase highway and transit investment and result in real and long-lasting stimulus." MM


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