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Business Outlook Construction Equipment Industry Will Muddle Through 2013 As world economies face their respective challenges, machinery demand grinds downward, including here in North America. Eli Lustgarten Industrial activity peaked globally in the spring/summer of 2012, after which came the weakening of construction equipment demand. Global politics froze virtually all major markets. Further, most global manufacturers opted for inventory liquidation in 2H2012 and 1H2013 in response to weakening global activity led by two sectors that overproduced more than any other – heavy trucks and construction equipment. Currently, U.S. end markets have been somewhat stronger, Europe weaker, and emerging markets somewhat disappointing but beginning to improve. In Japan, quantitative easing is promoting the decline of the Japanese Yen, which will affect competitive positions, but U.S. companies will likely fare better than their European counterparts due to far stronger demand. China's 2013 growth plans are more muted as they attempt to remake their economy with more domestic demand, driven with less reliance on exports and investments in capital-intensive, stateowned companies. A modest GDP growth target of about 7.5 percent (1Q13 7.7 percent) suggests Beijing is willing to tolerate slower growth short term to revamp its economy for the future. While 1Q2013 GDP growth in the U.S. was a disappointing 2.5 percent (consensus was 3.2 percent), it did allay many near-term economic fears. The U.S. economy has survived everything from the payroll tax hike to early sequestering with a record stock market and an unexpected modestly improving jobs picture. Quarterly results ending March 2013 pointed to a bottoming of inventory destocking. Within the construction equipment market, we saw greater-than-expected strength in AWPs, sluggish demand for cranes, and very weak mining markets that will likely persist through 2014. In sum, "Muddle Through" remains the theme with slow global economic growth in 2013. Construction equipment sales in 1Q2013 is following suit according to CNH Global with global sales of light equipment down 8 percent worldwide and heavy equipment sales falling 23 percent, reflecting the sharp fall-off of demand in the mining sector. North American sales fell about 5 percent across most end markets – Europe was down 12 to 13 percent, and Asia Pacific countries saw an 8 percent decline in light equipment shipments and a 31 percent fall-off in heavy equipment led by continuing weak China demand. Only Latin America reported flat light equipment sales due to a modest recovery in Brazil, though heavy equipment in that region did fall about 9 percent. While the second calendar quarter will still see somewhat soft activity, the outlook for the second half of 2013 is beginning to show some promise. Inventory liquidation will likely come to an end for virtually all manufacturers in virtually all regions except perhaps China, where reduction of all equipment on the ground may take most of 2013. The housing recovery is gaining some steam and the big debate for 2013 is: Which side of a 970,000 forecast do you believe in (compared to 780,000 in 2012)? Further gains are expected in 2014, taking us on the road to a more normal level of housing activity, likely between 1.3 million and 1.5 million starts. Nonresidential construction should continue its moderate recovery in the 5- to 10-percent range, but it is a tale of two very different markets. Private nonresidential spending will more likely grow in the 10 to 15 percent-plus range (versus 18 percent in 2012), led by power, pipelines, manufacturing, warehouses, higher education, data centers and hotels. Public nonresidential markets will likely decline at least 2 to 5 percent (versus -3 percent in 2012) with minimal to negative growth in highway, education and other markets because of declining federal funds. Our forecast for 2013 construction equipment demand remains at flat to down 10 percent in North America, a double-digit decline in Europe, and plus-or-minus 5 percent in Asia Pacific. The one bright spot is Latin America, where we expect 5 to 10 percent increases driven by Brazil's major infrastructure needs for the World Cup and the Olympics. Our surveys indicate that in the U.S. rental companies, which bought more than 50 percent of the equipment in 2012, are planning flat expenditures for 2013, with a shift from earthmoving equipment to other products. The only sector facing a very difficult outlook for 2013 is mining – our latest surveys suggest that capital expenditures will fall at least 37 percent for domestic coal mining and slide in midsingle digits or more in most other markets. While we expect domestic coal mining spending to stabilize next year, noncoal mining capex will likely fall at a double-digit rate in 2014. The construction sector is currently in a transition year. Push the politics (and perhaps mining) aside, and the construction industry is poised for at least several years of moderate growth. Eli Lustgarten (elustgarten@aol. com) is president of ESL Consultants, an industrial consulting firm. June 2013 | Construction Equipment Distribution | www.cedmag.com | 47 47_business outlook_KP.indd 47 5/31/13 1:05 PM