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Heavy Equipment Report

An Uncertain View

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MCN Editor Beth Gainer Factors such as the pandemic, demand being greater than supply, and inflation have put a strain on the heavy equipment supply chain with no end in sight.

The heavy equipment supply chain has not yet recovered from the effects of the pandemic. Demand continues to outpace supply. Shortages of machine components, semiconductors, increased lead times, volatile material pricing and inflation are all factors working against the heavy equipment industry. 

“You have economic growth that went through a severe contraction from COVID and a massive recovery,” says Eli Lustgarten, president of  ESL Consultants, St. Louis, adding that manufacturers in the supply chain had to cut production and reduce inventory. Overall, “2020 was a disaster, and it fell off a cliff,” he says. “And 2021 was a boom, in which demand far exceeded supply, and company sales were up dramatically in double digits. But they still couldn’t meet demand and that carries on into 2022.” 

Lustgarten says such high demand has placed enormous strains on manufacturers’ ability to increase production and production capacity, along with a reduction in inventory as companies desperately try to meet demand. 

And, as is the case in most industries, labor shortages in the heavy equipment market are running rampant with no sign of relief. “Whether it be heavy equipment or steel-related fabrication, we have a labor shortage, which really hurts us and the OEMs. And we don’t see that going away,” says Patrick Dickerson, business development manager for TF Warren Group, which owns Premium Plate in Axis, Ala.

And other shortages abound. Many parts used in the manufacture of heavy equipment, such as hydraulic components and wiring harnesses, are hard to come by. Yet demand for them is still soaring. 

“Manufacturers are making all they can, which is still more than two years ago,” says Kent Brown, president and CEO of O’Neal Manufacturing Services, Birmingham, Ala. He adds that “supply chain disruptions have affected many of the components they purchase from overseas.”

Rob McBride, director of sales, North, at Steel Warehouse, South Bend, Ind. concurs, saying that products such as lacquer for paint, as well as tires, are in short supply. “All the ancillary products that come from offshore since last year have been slow to get here and have really slowed down almost every market,” he says.

The global chip shortage that has plagued the automotive industry has also adversely affected the heavy equipment industry. “The manufacturers can make all the equipment they want, but they can’t get the proper computer chips to run their electronics or hydraulics,” says Dickerson, adding the huge barrier impedes putting machinery on the market.

The pandemic, labor shortage and supply chain issues have kept manufacturers from getting caught up as quickly as they would have liked, causing demand to spread out over a longer period of time. “But the demand is there – from essentially taking a year or a little over a year off during the pandemic – and a lot of people delayed purchasing heavy equipment and they can’t wait any longer,” says Brown. 

Dickerson acknowledges it’s difficult to get deliveries, whether from the mills or from the steel processors to the OEMs. As an example, on a Friday when he was working on an order with a mill, the mill quoted him an early March production date. Yet the very next Monday, when he placed the order, the mill quoted him a late March production date.

Volatility not only affects lead times, but pricing as well. Forecasting pricing is difficult, which indirectly affects the price manufacturers charge for equipment. “Getting the steel with control-ordered entry is very difficult for these heavy equipment guys to plan their operations and manufacturing when they really don’t know exactly how much steel the OEMs are going to get, when they’re going to get it, and the cost that it’s going to be,” says Dickerson. 

The OEMs are trying to bring more companies into their supply chain, where they have options to obtain additional steel they can’t get through their current supply chain. “They’re changing up the way that they buy, and sometimes the more suppliers you have, the better off you are,” he says.

Among the sectors. mining has been scuffling, according to McBride. “It’s been tough to be a mining company in the United States,” he says. Lustgarten concurs. “Government regulation and permits have been a problem in the mining sector. In this country, policy is a huge factor because of regulation and difficulty in getting permits,” he says, adding that  mining activity is not booming, though it should be to fill a need for raw materials such as copper and lithium.

On the other hand, the agriculture and construction markets are experiencing robust business.  That’s been true for O’Neal Manufacturing Services, which has been able to provide needs for customers that its competition cannot. Brown says demand is up over last year, and the company is increasing its business.

“We’re winning a lot of additional work that, in some cases, our competition failed to deliver on last year, and now we are winning those parts,” he says. “We’re winning parts permanently that were initially one-time emergency work we did last year when others struggled more to hire people and get access to metal.”

Among the country’s largest manufacturers, Caterpillar Inc. had better-than-expected results for Q1 2022. During the company’s first-quarter earnings conference call in late April,  CFO Andrew Bonfield reported sales and revenues increased by 14 percent. “Volume, including higher dealer inventory build and price drove the increase in sales and revenues,” he said.

Bonfield noted the sales in the construction industries segment increased by 12 percent.  End-user demand improved, with North America having the highest sales growth, a 28 percent increase, as nonresidential demand improved and residential construction remained strong.

Brent Norwood, manager of investor communications for Deere & Company, the company’s production and precision ag segment’s sales are expected to be up between 25 percent to 30 percent in fiscal year 2022. In the U.S. and Canada, large ag equipment sales are projected to be up 20 percent. In 2021, customer demand outpacing the industry’s ability to supply, attributing this to aged machinery and low field inventory. He expects demand to continue outpacing supply throughout 2022, “as supply based delays continue to constrain shipments.”

Steel pricing is also making heavy machinery more expensive. “Steel prices are up dramatically, so availability is questionable; it isn’t going away,” says Lustgarten.

Brown agrees. “The rapidly increasing steel prices hurt the manufacturers in 2021.  A lot of equipment was sold at the lower steel prices, and by the time the equipment was made and shipped, the steel price had escalated sharply,” he says. “This raised the equipment cost and lowered the profit margin.  The fact that it was harder to find people and get components meant that there was even more time for steel prices to rise before the equipment was shipped at the lower negotiated price.  In most cases they could not go back to the customer and ask to raise the price on equipment that was already late being delivered.”

McBride points out that steel availability has been even a larger problem than steel prices. “There’s so much of a backlog, I think people are somewhat willing to pay almost what they have to in order to get their equipment,” he says. 

The rising costs and unpredictable availability of raw materials and difficulty obtaining steel are challenges. “Can you get the tons? And can you get the tons when you want them because of controlled-order entry by the mills? The first- and second-tier processors are getting squeezed due to the credit limitations of even higher cost due to inflation,” says Dickerson. The steel industry is a tight market, indeed, placing limitations on the tons companies can purchase. 

McBride has even heard talk of a possible short, shallow recession resulting from inflation. And higher interest rates can make purchasing heavy equipment cost-prohibitive, he explains:  “Every point that goes up inflation-wise, you reduce the amount of people that can afford to be in your market.”

And the end-user at times may decide to wait until prices fall before purchasing a machine. Yet some end-users have no choice but to purchase the equipment anyway. “Not all can wait because they may have had deferred purchases already during the pandemic, and they can’t wait any longer to replace equipment,” says Brown.

“Inflation is a concern to everybody. It makes the price of their equipment go up and potentially have negative effects on profit,” says Dickerson, adding that inflation in Q1 of 2022 rose approximately 9.7 percent, and there’s no sign of it slowing anytime soon, “so that makes all the costs go up – steel, energy, transportation.”

While predictability is always difficult in cyclical industries such as the heavy equipment market, adding inflation into the mix makes it even more unpredictable.

Besides inflation, there’s another “I” word: infrastructure. The Biden administration’s infrastructure plan has potential to bode well for the construction industry. However, as with any plan, there are obstacles to overcome. “In construction, ‘infrastructure’ is the word we’ve talked about forever; you get an infrastructure bill, but now the government policies are throwing wrenches in the ability of infrastructure to respond rapidly, but the needs don’t go away,” says Lustgarten.

But for OEMs, the infrastructure bill shines a bright light. “Stimulus infrastructure money is beginning to trickle down to the OEMs, so that’s a positive thing,” says Dickerson.

Brown is also optimistic. “All of our forecasts are very strong through the remainder of 2022. There was a lot of pent-up demand going into 2022.  The shutdowns during the pandemic, the lack of workers, and supply chain issues have kept equipment manufacturers, for the most part, from getting caught up.,” says Brown. “In a way, these issues are spreading the strong demand out over a longer period.”

However difficult it is to catch up, Dickerson’s guarded optimism prevails. “As for current growth for the heavy equipment industry for 2022, I’m seeing around 3 to 4 percent, and as of right now – subject to change – I’m seeing and hearing about growth of 5 to 9 percent in 2023, which is good,” he says. “But everything’s so volatile, and it’s a fluid time right now in our industry.”

And despite the equipment industry’s ups and downs, O’Neal Manufacturing Services has had longevity. Last year was the company’s 100th year in business and it is starting its second century strong.  Brown says, “2022 could be a record year for us with all of this demand, if we can keep adding good people, keep the good people we are already fortunate to have, and execute.  We know the good times never last forever, so we have to get to work now and capitalize on this year’s demand.”

Mining giant Caterpillar has modified its cabs for comfort. (Photo courtesy Caterpillar)

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