Why the downturn could be good for plant hire

A downturn in construction isn't necessarily bad for plant hirers, with contractors looking to move large items of capital expenditure like plant fleets off their books.

With the economy in such a state of flux, looking at the past year as a pointer to the future is not that useful - but outside of those who have experienced other downturns, it remains the best guide we have. And in order to decide the best way forward, it is vital to get a handle on the current situation.

Figures from Catherine Stratton's Plant Hire Investment Report show that plant hirers have five of the six biggest plant holdings in the UK with only Balfour Beatty spoiling the clean sweep. On a wider scale, half of the 75 biggest plant fleets belong to hire companies and the other half to contractors.

The top 10 plant owners have remained in the same position as last year save Hewden, which has slipped to fourth position having been passed by Speedy Hire which purchased its tool hire business.

Last year, with the economy booming - largely buoyed by what Bank of England Governor Mervin King warned was an 'unsustainable increase in house prices' - plant owners invested heavily with only nine of the top 75 having a smaller fleet this year.

Now, with a spectacular rise in fuel prices, house prices undergoing the predicted 'correction' and dragging down other private sector work, the economy has ground to a halt and the tables have been turned. In a few short months, plant manufacturers have gone from having waiting lists to making redundancies, housebuilders have switched from record profits to record losses and far from throwing money at anybody who makes eye contact, banks have become frightened of lending.

This has lead to a situation where plant owners have bigger fleets and higher running costs, but with less work and lower residual values. Selling machines at rock bottom prices won't do a great deal to rectify the balance sheet. Those disposing of kit abroad may fare better as markets in the Far East and the new EU accession countries remain strong.

Moving assets

But if history teaches us anything it is that construction downturns are not necessarily bad for plant hire, as it prompts contractors to look at ways to move capital assets off their books - and plant is usually their biggest item of capital expenditure. This gives plant hirers the opportunity to supply contractors with machines on a hire basis as and when needed - and possibly secure a long-term commitment. Such deals may include purchasing the existing fleet and even employing the operators, but that would take the deal into different territory.

And not all sections of the construction industry have been as badly hit as housebuilding. The access market, for instance, is not dependent on new construction because Work at Height Regulations mean maintenance crews from virtually all industries are big users. This includes petrochemical work which is one of the few markets doing well at the moment.

Then there is the recycling market which has also been boosted by legislation - in this case the introduction of Site Waste Management Plans. While demolition has slowed in line with the general construction market, the requirement for small crushers and screens is still well ahead of last year and looks set to consolidate its position.

Public sector construction work has not suffered the same slowdown as the industry in general and projects such as the Olympics and Crossrail will go ahead. Then there is the Highways Agency, which is placing a £560m, five-year contract to build roads like the Midland link motorway also Network Rail, which is spending £800m on track enhancement - and another £500m on Birmingham New Street alone. With AMP 4 well underway, there is plenty going on with the utilities sector and the Thames Tideway Tunnel forms part of a £2bn project. Across the UK there is still flood relief work underway and massive investment still going into schools and hospitals. So it isn't all bad news.

Tender lists

But as the general slowdown leads to an excess of available machines, so contractors winning publicly funded work can be more choosy about their suppliers. A plant hirer with older kit could struggle to get on the tender list. So despite the slowdown, hire companies sticking to renewal policies are likely to benefit.

A close look at the options for obtaining plant is a very good place to start but there's no escaping the hard decisions, and the earlier they are taken the better. How this will end nobody knows, but each company must plot their way through the challenging period as best they can.

By the time we get to read Stratton's 2008/2009 report, we will know many of the answers.