Plant growth some way off
00:00 22 Sep 2009
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Plant-owning contractors and hire companies face lower utilisation, falling residual values and forthcoming regulations. Colin Sowman asks what they should do with their fleets.
With plant sales hitting both an all-time high and an extreme low in the past year or so, should contractors and hire companies sell equipment, hold on to what they’ve got, or buy more kit while prices are cheap?
"That’s a question each company must answer for itself depending on its needs and circumstances," says David Phillips, managing director of Off-Highway Research (OHR).
To reach an informed decision, plant owners must consider the plant market on a wider scale, he adds.
The UK was Europe’s largest plant market in 2006-2007, reaching an unprecedented and unsustainable level of almost 40,000 units in 2007.
By early 2008, a 15% correction was widely forecast, but the financial collapse took full-year sales down by 28%.
"All equipment sectors have been badly hit, particularly crawler and mini excavators, telescopic handlers and articulated dump trucks," Phillips explains.
In the first quarter of 2009, OHR’s annual survey of around 250 European manufacturers and dealers concluded that the rest of the year would be very difficult.
High levels of stock, weak business confidence and a large population of recently purchased machines are likely to depress sales for the rest of this year and the first half of 2010.
"We originally forecast that demand would fall by 26% during 2009, with a modest (+2%) recovery in 2010," Phillips says.
Bleak outlook
However, in OHR’s discussions with European OEMs and their dealers over the summer, it became evident that the outlook for the rest of 2009 had weakened considerably and the optimism evident at the SED show in May had evaporated.
Phillips says: "We are now forecasting UK demand will fall 43% in 2009, but still hope for a 2% upturn in 2010. It took four years to recover from the recession of the late 1970s and 1980s, and this one could take even longer."
Even when recovery arrives, the UK plant market is going to be much smaller. "It’s unlikely to ever return to the bloated levels of 2006-2007 and will probably settle nearer to the 27,000 units mark seen in 2002-2003," he says. "But that’s a big increase from the current level of around 16,000 units, so there is much potential for new equipment sales over the next two to three years."
What does this mean for UK contractors and hire companies looking ahead to next year and beyond? Phillips believes the majority will not need to renew their equipment for several years.
"Most of the machines for projects such as the London Olympics and the widening of the M25 have already been purchased and it is unlikely that many projects in the pipeline will encourage new equipment orders," he says.
This leaves many contractors and hire companies needing to trim under-utilised fleets.
As the UK entered recession early, many hire companies were able to dispose of excess equipment while demand was still strong overseas, and the current low value of sterling against the euro is helping to prolong this escape route for those offloading kit.
However, Phillips feels the number of new or nearly new machines circulating in the UK and Europe remains high and is likely to depress prices until the middle of 2010.
OHR found the weak exchange rate means UK dealers’ stock levels have been sharply reduced (and in some cases eliminated) by exporting the machines and many of our hire companies have disposed of the newest items in their fleets.
This leaves the UK with an older machine population, which is good news for suppliers because the equipment will need replacing sooner once the market recovers. But Phillips has a warning: "This could result in a false boom, as happened in both the late 1980s and in 1993-1994."
If sterling has not recovered by the time contractors and hire companies need to renew their fleets, the new machines - especially imported ones - will likely carry a price premium.
Rising prices
Phillips highlights another reason it might be advisable to order early: "Stage 3B emission regulations start taking effect in January 2011 and compliance is likely to cause a sharp increase in machinery prices." If the new machines come with other useful upgrades it might be worth paying the premium, otherwise buying early may be the better bet.
One area that may grow is long-term dealer leasing with the option to purchase. This gives customers access to new machines without having to pay up front and ensures dealers receive a regular income over two to three years as the market settles to its new lower level.
What is certain is that demand for construction does not end with the recession and nor does the market for construction plant.
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