August 2013

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Business Outlook Construction Equipment Demand Appears To Have Bottomed, Now What? North America outlook still flat to down 10 percent. Eli Lustgarten While we await midyear data, anecdotal evidence from most regions of the world suggests that demand for construction equipment has bottomed, with only the mining sector still showing substantial distress. U.S. end markets still appear to be the global bright spot despite a downward revision of 1Q2013 economic growth to 1.8 percent (from 2.4 percent, the originally reported 2.5 percent and consensus of 3.2 percent) due to somewhat slower personal consumption expenditures, lower inventory build and, sadly, slower construction spending. The U.S. economy has survived payroll tax hikes, and sequestering with the aid of quantitative easing, which has driven the stock market to record levels. The most recent surprise has been the upward revision of job formation, which now appears to translate into almost 200,000 new jobs created each month this year. While still viewed as a weak recovery, the recent mediocre strength of the U.S. economy has caused a reaction by the U.S. Federal Reserve, beginning a tapering of its bond purchasing program, a fear that has caused the financial markets to drive up interest rates from historically low levels. All of a sudden, there is now talk of mortgage rates approaching 5 percent or more rather than the extremely low rates that characterized most of the past several years. While the second calendar quarter of 2013 will likely see continuing soft economic activity, the outlook for the second half of the year continues to show some promise. Inventory liquidation appears to be ending in virtually all end markets, save mining. The housing recovery is gaining some steam and, despite riding rates, the only debate currently is which side of the slightly downward revised NAHB 955,000 housing start forecast will be correct (was 970,000; 2012 was 783,000). Nonresidential construction is continuing its moderate 5- to 10-percent recovery with double-digit gains in private spending, offset by low- to midsingle-digit decline in public nonresidential outlays. Further moderate gains in both construction sectors are expected in 2014 and beyond. Moreover, construction equipment demand trends are firming across most regions outside North America. Europe 2Q13 has benefited from the successful Bauma trade show and selective improvement in spending. Compact/smaller equipment (mobile excavators) demand is up, offsetting weak interest in larger machines. Rental is rising in a period of uncertainty. In Latin America, Brazil is strong in spite of protests led by ongoing BR-101 highway spending, infrastructure and related World Cup and Olympic 2016, and focused programs (motor plant, iron ore, cellulose plant, forestry and especially Ag). Air-conditioned cabs are in vogue, helping Caterpillar. Weakness is being reported in Peru and Chile driven by mining woes. China's mixed results point to stabilization of demand as inventory is depleted. We are receiving reports of positive sales against easy comparisons, a significant improvement from year over year declines of 21 percent to 42 percent we have heard over the past six months. Our forecast for 2013 construction equipment demand is unchanged, for now, at flat to down 10 percent in North America. Europe forecasts for 2013 are now centered on low-singledigit decline, an improvement from our prior double-digit fall-off amid uncertainty tied to new equipment pricing (emissions increases) and macro fears. Latin American dealers forecast improvement on average of 9 percent underscored by resurgence in government spending across most regions, led by civil construction and infrastructure, energy, and select mining projects. Even China's outlook has improved for 2H2013 expectations (up 11 percent), reflective of new government projects possibly in the pipeline and private fixed asset investment. The only sector with ongoing deterioration of its outlook is mining. Our latest surveys continue to show a 40 percent or more decline in coal equipment capital spending in North America and midsingle-digit or more weakness abroad. More recently, the Obama administration has renewed its declaration of war against coal power plants with a focus of reducing coal use both domestically and abroad. While the problems in thermal coal continue to escalate, the outlook for metallurgical coal has deteriorated, with prices falling to $150/mt due to high inventories and weak steel production, a level at which half the met coal industry is unprofitable. The outlook is for mine closures and reduced production further delaying the stabilization of the coal sector demand. Noncoal mining capital expenditures are expected to decline at least 15 to 20 percent in 2014. Mining will be troubled well into next year. The construction sector is currently in a transition year. As we said last time, 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. August 2013 | Construction Equipment Distribution | www.cedmag.com | 55 55_business outlook_KP.indd 55 7/25/13 1:00 PM

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