August 2014

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Will Someone Please Turn on the Global Light? North America is about the only bright market this year, and even mining may be coming out of the dark. U.S. construction activity continued to improve moderately in the first half of 2014. The most recent data indicates that construction activity continues to expand at about 6.6 percent but with lots of volatility by project type and by month. Most recently, increases in private nonresi- dential and public construction have offset a slowing in residential projects, and the modest pick-up in highway spending is in danger of reversing if Congress can't find a quick solution to salvage the federal Highway Trust Fund. This uneven pattern of month-to- month results is likely to continue for the rest of the year. Residential spending has softened somewhat (down 1.5 percent in May) though still up 7.5 percent for the year. It should be no surprise that the National Association of Home Builders (NAHB) has again lowered its housing starts forecast for 2014 – originally 1.16 million, then 1.086 million and now 1.040 million (versus 930,000) though still up 11.8 percent from last year. The NAHB remains optimistic for 2015, however, with starts jumping 26 percent to 1.312 million and a further 16 percent in 2016 to 1.523 million. However, this projec- tion may be optimistic as it is driven by big jumps in single-family starts over the next two years, in contrast to many economists being more optimistic on multifamily construction. Private nonresidential spending continues to gain and is up 11 percent year to date driven by power and energy, oil and gas (up 30 percent), office (up 23 percent), manufacturing (6.7 percent), and even commercial and retail/warehouse/farm projects (up 6.5 percent). Public nonresidential is up a modest 1.2 percent YTD driven by highway (up 2.3 percent), which may or may not hold up depending on politics. In sum, while domestic data shows significant variability month to month, the moderate gains are sufficient to drive construction equipment expendi- tures up in the 8 to 12 percent range, consistent with our current forecasts for the sector. We wish conditions were getting better outside of North America. Our surveys confirm that a stronger NA market (up 10 to 12) and modestly/ moderately improving European demand will offset more significant weakness in activity in Latin America and the rest of the world. Europe is a slight bright spot for construction outlook, supporting our expectations of a modest/moderate recovery. Germany is strengthening, but France is weak, and overall we expect a slow recovery from most of Europe through 2H14. European equip- ment demand is currently running up mid-single digits. Latin America saw significantly suppressed demand continuing in Peru, Chile, and Argentina, in line or worse than originally anticipated, mostly relating to government poli- cies. Brazil saw less-than-expected demand ahead of the World Cup and elections (October), which has signifi- cantly lowered expectations for 2H14. Demand is currently running down mid-teens. China: While declining results were expected, the extent of the downturn may have been underesti- mated. Nearly all contacts saw signifi- cant declines in demand and expect year-over-year decline to continue at a mid-single digit rate until govern- ment policies and credit availability become more accommodative to large investments. There are, however, the early signs that the mining sector is bottoming. OEM demand remains very soft to nonexistent, but replacement and maintenance, repair and over- haul (MRO) spending has picked up. Many mining companies have post- poned normal replacement and MRO spending but are now faced with the economic reality that they must ante up to maintain production. A good example would be demand for mining trucks, which normally are replaced every 15,000 to 20,000 oper- ating hours. This used to occur some- where between two-and-a-half to three years. Miners have been conser- vative and the replacement cycle seems to have stretched out to a three- to four-year timeframe since the 2011- 2012 peak at 1,500 units industrywide, which has fallen to about 400 units per year today. Miners are running machines a little bit longer with a fleet of idled equipment ready to replace any downed machines; an overheated 2011-'12 replacement cycle signifi- cantly lowered fleet age and improving quality of miners' fleets; and miners are unwilling to make significant investments in the current suppressed mining environment (mostly related to low commodity pricing). But the replacement cycle can't stretch much further, so we expect more activity may be forthcoming to a new normal of perhaps 500 to 700 units per year. Bottom line, NA is currently the only game in town that's providing optimism for the CE industry, and probably the main source of volume gains globally in 2014. ELI LUSTGARTEN (elustgarten@aol. com) is president of ESL Consultants, an industrial consulting firm. ELI LUSTGARTEN Business Outlook August 2014 | Construction Equipment Distribution | www.cedmag.com | 55

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