Current Issue

Heavy Equipment Report

Peak Not Yet Reached

By on
Strong backlogs and government spending are among the factors that have kept the market for heavy equipment robust through the middle of 2023. 

The U.S. heavy equipment market has been quite strong and is expected to remain so this year, helped by the backlogs of equipment that have accumulated over the past few years. There are, however, concerns that some sectors of the market could be approaching a cyclical peak, especially if economic conditions soften to the point where they affect buyer sentiment. 

Even with the current economic uncertainty and sticky inflation making everyone a little cautious and nervous, 2023 will be an even better year for the heavy equipment market than 2022, Eli Lustgarten says. And 2022 was a very good year for the industry, the principal of ESL Consultants notes. 

The prior year was marked by strong pricing and tight supply of equipment, with original equipment manufacturers struggling to ramp up production. Those challenges were caused by a phenomenal buildup in backlogs that occurred due to the supply chain and labor issues as users emerged from COVID pandemic-related shutdowns. 

“It is too early to tell what kind of impact the fear of a recession and challenges financing equipment will eventually have upon the market, but right now business is still strong,” observes Paul Satore, vice president of sales for Design Storage & Handling.  

“Whether they will fall apart with inflation is anyone’s guess,” Mike Lerman, president of Steel Warehouse, declares, “But right now they are planning for their demand to remain fairly strong,” with end users ramping up production and taking more steel, especially given that supply chain issues aren’t being as disruptive. 

Tim Morris, senior vice president of sales and market development at JLG Industries, says several key indicators suggest the heavy equipment market will remain healthy as it moves through 2023 and into 2024, as supply chain dynamics trend more positively and the labor market continues to level off. Also, he says, the average fleet age of equipment at rental companies, which are older than desired, is another positive as it will likely mean that those equipment-leasing companies will actively invest in new equipment. 

Caterpillar Chairman and CEO Jim Umpleby said during the company’s recent earnings call that its first-quarter sales were better than expected – up 17 percent year on year, including a 5 percent increase in sales for the construction industry, an 18 percent increase for resource industries and a 39 percent increase for energy and transportation – and that the OEMs’ healthy backlog will continue to underpin its constructive view about those end use markets. 

Similarly, Eric Hansotia, chairman, president and CEO of AGCO Corp., said during his company’s first-quarter earnings call that supportive farm economics have resulted in robust demand for large agricultural equipment. Consequently, AGCO’s North American order backlog for equipment such as tractors, combines and sprayers is extended into 2024. On the other hand, he noted that sales of smaller equipment declined from their high levels in 2022 and that overall North American farm equipment retail sales were down about 3 percent year on year. 

While he admitted that some more macro tailwinds are going to play out, Hansotia said, “We still feel that we have a strong [farm equipment] market in front of us.” 

Josh Kneidl, director of marketing and project management for Benjamin Steel Co., agrees, noting that the high price of food should result in increased demand for agricultural equipment, explaining that any time prices of certain farm commodities, such as wheat, are way up, that will filter down to increased demand for farm equipment. 

However, Lustgarten says farm commodity prices recently leveled off and came down a little bit, which he says could slow down demand for farm equipment, especially small- and medium-sized equipment. 

There is also downside risk going forward for the construction equipment market, says John Anton, director of S&P Global Market Intelligence’s pricing and purchasing service. This threat is heightened given it is somewhat surprising the market came back so strongly from the mid-2020 COVID pandemic while construction activity on the whole had not.
 
Kneidl points out that U.S. construction activity is mixed, with residential pulling it down. Rising prices and interest rates over a relatively short period of time have taken a portion of potential buyers out of the market. 

On the other hand, he notes, U.S. nonresidential construction activity is expected to remain strong at least through the summer. JLG’s Morris agrees, stating, “While nothing is ever guaranteed, we believe that numerous mega-construction projects going on in the U.S., coupled with the momentum that we expect from the bipartisan Infrastructure Investment and Jobs Act, make for a very promising future.”

But Scott Hazelton, director of S&P Global Market Intelligence’s construction service, notes that U.S. nonresidential construction activity is also mixed. Particularly strong is manufacturing construction, helped by such newly passed legislation as the Inflation Reduction Act and CHIPS and Science Act, which have encouraged the building of numerous semiconductor chip and battery production plants. 

Partly due to the IIJA, the U.S. has seen 14 percent growth in highway and bridge construction this year and that it is expected to grow another 8 percent this year and to keep on building through 2025. Also, Hazelton says water infrastructure construction is expected to be up about 7 percent this year and construction of such transportation infrastructure as seaports, airports and railroads will be up about 8.7 percent this year and another 6 percent next year. 

While federal funds from recent bills are starting to flow into the marketplace, Lustgarten notes that they haven’t done so in huge numbers yet. 

Meanwhile, Philip Gibbs, senior metal equity analyst with KeyBanc Capital Markets, says that with commodity prices being as high as they are and the fact there are a lot of three- to five-year mining projects on the books, demand for mining equipment has been strong. Lustgarten says another factor increasing the desire for mining companies to buy new equipment is their current fleet is quite old. Also, Caterpillar’s Umpleby said the energy transition will support increased commodity demand and therefore provide further opportunities for heavy equipment. 

Demand for equipment in certain niche markets is also robust. Chris Campbell, vice president at Vermeer Corp., says that is the case for recycling, forestry, underground utilities, tree care and landscaping equipment.  An easing of supply chain issues, the buildout of underground fiberoptics infrastructure and work-from-home people looking at such projects as taking down trees and installing pools and patios have led to a strong environment for trenchers, loaders, drills, brush chippers and excavators. 

Similarly, there is very strong demand for industrial machinery, whether equipment such as forklifts that are used in manufacturing or distribution facilities, or machines such as aggregate crushers, which are used to support infrastructure work. In fact, Kneidl says despite some talk of it peaking, March was one of the highest performance months for industrial equipment he had seen in some time. 

While there are several factors behind that, Satore says some of the increased investment in industrial equipment is being supported by the desire for companies to be “greener” and to replace older forklifts and other industrial machinery with electrified models. 

That, Lustgarten says, is part of a general push in the heavy equipment market for technological improvements, including electrification and autonomy. He explains that the marketplace as a whole needs more efficiency and electrified equipment is quiet and efficient and performs well. “But they cost more and they need to be managed so they can work a full day.” Satore, however, says that is becoming less of an issue with recent improvements in rapidly evolving charging technologies. 

It is, however, different for industrial equipment, as those machines tend to operate close to their base location, Lustgarten says, noting it is challenging for equipment doing work in more rural areas. Hazelton agrees, noting the work that construction equipment does tends to involve a lot of heavy lifting and hauling in off-road locations, which creates a problem with charging. Also, he notes the incentives in the IRA to build more charging stations do not apply to off-road vehicles. 

Lustgarten says that while there is no question that more heavy equipment will be electrified, the pace of that growth is debatable largely due to issues related to power availability. 

Another technological change for some heavy equipment is the move toward greater autonomy, which is particularly seen as being attractive given the tight labor market. Actually, JLG’s Morris points out the hunt for autonomous machines and technologies – including the use of augmented reality – is not new. Still, it seems to be getting accepted quicker by certain heavy equipment sectors, Lustgarten says, particularly for mining trucks, but also for farm equipment where it’s used to plant fields in a predictable uniform platform. 

“Autonomy isn’t quite as popular for construction equipment,” Gibbs maintains, given that construction work is more precision work. However, Morris says even in construction, autonomy can aid in certain repetitive tasks that could result in an overuse injury. “Now, more than ever, manufacturers are searching for ways to boost safety and efficiency using automated solutions,” he says. 

Augmented reality – a technology that superimposes a computer-generated image on the user’s view of the real world – is part of a megatrend to connect everything, including heavy equipment, to the Internet, making real-time data and information accessible anytime and anywhere, Morris adds. 

At the same time the market is experiencing strong demand, heavy equipment production, like the manufacture of many goods, has been affected by a combination of supply chain and labor issues. In fact, Lustgarten notes those issues had caused industry backlogs to double when the market came out of COVID. Now, with some of those worries starting to ease, equipment OEMs are starting to catch up. 

Their ability to do so, however, is being affected by the availability of certain raw materials, including steel and certain other metals and exotic materials. Anton notes the No. 1 type of steel used for heavy equipment is plate, which currently is selling at a near record premium over hot-rolled coil – at approximately a $600-per-ton spread compared with its average $200-per-ton differential.

There is potential for plate prices to increase even further from over $1,500 per ton in late April on the back of the $40-a-ton price hike announced by Nucor in mid-April, and its long, albeit not extreme, lead times.
 
Gibbs believes the tightness in the plate market is more supply than demand driven, with some domestic mills throttling back output at the same time as plate imports have eased. Nevertheless, even with Nucor starting up its new Brandenburg, Ky., mill, the combination of plate prices, as well as generally persistent inflation, is a thorn in the side for a lot of equipment producers. 
Because of that, some of the OEMs have been looking to substitute some of their plate with HRC, Lerman observes, noting that his company, like some other service centers, has the capability to buy and process heavy gauge HRC and to offer that product as an alternative to plate. 

Another steel issue relates to special bar quality bar, Anton says, given that several major SBQ producers, including TimkenSteel and Gerdau, have been having problems ramping up their production, particularly due to labor issues. This is happening at the same time demand from the energy sector –  which accounts for about 10 percent of its U.S. consumption – is doing very well. Moreover, North American automotive output, while still below its pre-pandemic high, has been recovering. Also, Gibbs notes, SBQ contract prices are expected to move upwards. 

“Overall, it is a good time to be in the heavy equipment market,” Vermeer’s Campbell declares. Lustgarten notes that, especially with the availability of used equipment so tight and with inventories of new equipment being low, the market should be well supported for the rest of this year and into next year. 

Kneidl agrees, stating that at least in the short term, an economic downturn shouldn’t have much of an impact upon the market. “There is enough demand right now for the OEMs to weather the storm of short-term negative factors, although there may be regional differences in that level of demand.” Also, he says, federal funds from recently passed legislation should further support the heavy equipment market over the next few years.

[Caption:]
The market for heavy equipment of all sorts has held firm through the first five months of 2023.  (Photo courtesy JLG Industries)