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Heavy Equipment Report

Plowing Ahead In Tough Conditions

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Manufacturers of heavy equipment are taking a hit, the tell-tale sign of the coronavirus. Yet industry professionals remain hopeful for an uptick in business.

The COVID-19 pandemic is taking a heavy toll on most steel-consuming sectors of the industrial economy, and the heavy equipment market is no exception.

“What we’re experiencing is a 40 percent in aggregate reduction in sales when compared to pre-pandemic numbers,” says Kent Brown, president of O’Neal Manufacturing Services, one of the six divisions of O’Neal Industries, based in Birmingham, Ala.

The company provides finished burned-formed and welded structural steel components. The division’s main customers are manufacturers of heavy equipment, such as material handling, construction, agriculture and rail equipment. The steel parts O’Neal Manufacturing fabricates represent about 45 percent of the company’s total business.

“Initially, we thought it would be a short-lived decline,” says Brown. “But looking at our forecast for the construction and agriculture markets, those forecasts may suggest it will be at this lower level through the remainder of the year – maybe not down 40 percent, but still down significantly from where it was before the pandemic hit.”

“Before the pandemic, demand was strong,” adds Brown. “[The coronavirus] seems to have hit all the sectors we deal with; no one was spared.”
So agrees a sales manager at a Midwestern distribution company. He expresses a pessimistic outlook for the construction, mining and agriculture equipment markets. “They’re all awful, mining being the worst of these. For any kind of mining – whether it’s coal, whether it’s coke for the steel mills, there’s no demand; there’s nothing driving that,” he says. “Q1 was great both in our industry and the country, and we basically got through all of it, but Q2 will be the absolute worst and is going to be brutal.”

This distributor identifies itself as a mill depot in its hot-roll product line, and a mill in its cold-finished product line. The company has about 80,000 tons of product available at any time.  

The market for ag equipment has been hurt by the ongoing trade difficulties, particularly with China.

“When you listen to a Caterpillar call and you talk about heavy equipment, you need to understand how much of the product was going to China. That’s basically come to a screeching halt,” he says.

The numbers for Caterpillar’s financial statements tell a sobering story, one that resonates with that of many companies. In the first quarter of 2020, Caterpillar’s revenues were $695 million, down from $736 million during the first quarter of 2019.

The industry executive believes GDP will begin to rebound in the back half of the year. Though many businesses will be coming back online by mid-June, a lot will continue to operate at less than 100 percent capacity.

On the mining side, recovery could begin in southern hemisphere countries if commodity prices reverse, but relying on that is not a good bet. “This [coronavirus] is a game changer,” he says.

The coronavirus is indeed a game changer, heralding in economic uncertainty in all facets of business. The heavy equipment industry is no exception.

“It’s anybody’s guess how quickly things will bounce back,” says Christopher Plummer, group CEO of Metal Strategies Inc., West Chester, Pa. “It’s probably not a V-shaped recovery.” He estimates that business activity will moderately rebound by the third or fourth quarter of this year, but the bounce back will probably not be felt until 2021.

The remainder of 2020 is further complicated by the fears of a second wave of COVID-19, plus the heating up of the presidential campaigns. With the potential for a change in administration, it raises questions about how future capital expenditures will be taxed, adjustments to trade policy and other business issues.

Brown acknowledges the uncertainty brought on by the pandemic, but he is cautiously optimistic. “I’m hopeful that we’re at the bottom now and maybe we can see it start coming the other way,” he says. “But you don’t know about the talk of a second wave or how that will affect demand in the fourth quarter. Maybe it will improve a little in the fourth quarter, but not much.”

Demand was strong before the coronavirus hit, according to Brown, so he is hoping it will return if and when the uncertainty surrounding the pandemic is gone. “Everyone’s afraid to commit, and nobody wants to buy equipment right now,” he says. “They are cautious; they are worried about liquidity and their cash position, so people are in a wait-and-see mode.” Plummer agrees. “[Businesses] are trying to conserve their cash, control spending, hold off costs any way they can until they get through this thing,” he says.

Frank Nerenhausen, president of McConnellsburg, Pa.-based JLG Industries, Inc. notes the coronavirus has adversely affected his business. JLG Industries manufactures lift and access equipment. As is the case with many companies, Nerenhausen’s company has seen order delays and some cancellations, but these are expected, given the nature of the global pandemic.

“In terms of construction, our outlook for 2020 anticipated a slight decline in global demand for mobile elevating work platforms, with a headwind moving into 2021,” he says.

“In general, our outlook was positive, and our forecast aligned to the cyclical nature of the business, which is something we plan for. What we did not anticipate was a global health pandemic that would rapidly impact the global economy in ways no one could have predicted,” he continues. “While working to protect and support our employees and our communities, we have of course kept a fiscally responsible eye on the business.”

“Thus far, 2020 has thrown us several unanticipated curve balls and we are caught in a bit of a crosswind, but we believe recovery will come,” says Nerenhausen. “Our recovery roadmap is something we evaluate and discuss daily. From experience, we have learned that some of the biggest risks to a speedy recovery is not having the right people or inventory in place. To ramp up quickly requires a healthy ecosystem. This has helped guide our pragmatic and balanced approach to align supply chain availability with customer demand, while retaining team members.”

Brown notes the supply chains of other countries, such as China, which was gripped by the pandemic before it made its way to the U.S., have recovered. “There were a few instances where customers ran out of parts from overseas because [these countries] had shut down before the virus hit the U.S. Even that has recovered; we don’t hear much anymore about our customers running out of parts from foreign suppliers,” says Brown. “China and Europe are where the customers are getting these parts – but mainly China. There was some disruption when all this started, but that’s recovered now and recovered fairly quickly.”

“We’re not having any problems getting steel right now and the lead times are not increasing,” says Brown. “I think, like us, the steel mills will be able to ramp up quickly as well, and we’ll have the capacity. The prices will of course go up when the demand goes up, but I don’t think it will be a problem for the steel mills to ramp back up.”
Brown says the industry is cognizant of the fact the coronavirus could come back quickly, so caution remains the norm. At the same time, no one wants to be caught unprepared if the ramp-up goes quickly.

“I think that’s the greatest concern: making sure that they have the available capacity for the eventual comeback,” he says, but adds, “We will have the people and the capacity for that ramp up.”

Construction, Mining, and Agriculture

Analyst Christopher Plummer, group CEO of West Chester, Pa.-based Metal Strategies Inc., weighs in about the construction, mining and agriculture sectors. He says all three segments are dealing with the same issue.
“The biggest factor is the inventory drawdown at the dealer level,” he says. “The dealers who have finished construction equipment in their showroom or in their lots are trying to sell much more out of their inventory first rather than going to Caterpillar or Komatsu or some of the other big players to get brand new equipment.
“We won’t see a meaningful recovery in the buying of newly produced heavy equipment for construction, mining and farming until next year,” he says.

Before the coronavirus pandemic, construction in the U.S. was doing pretty well. Moreover, it retained more of its strength during and through most of the shutdowns. “Companies heavily in the construction sector are telling us their businesses are still quite strong by supplying those markets,” says Plummer.
Nonetheless, Caterpillar and Komatsu are reporting declines in their businesses supplying construction machinery.
“Caterpillar – which is 16 percent of the world market for the industry, the biggest share going into construction – is projecting a $1.5 billion dealer inventory decline for this whole year,” Plummer continues. “The global inventory reduction is going to be somewhere on the order of over $9 billion.”
Additionally, approximately 30 percent of heavy equipment maker John Deere’s equipment sales are in the construction sector.  “But Deere’s construction activity worldwide was down 9.7 percent through [its first quarter] and its U.S. construction equipment sales were down 12.3 percent.”  

Coal production in the U.S. in the fourth quarter was down 15 percent from the prior year.  Additionally, production since 2014 is down nearly 30 percent to 705 million tons.
“That’s a big decline and one of the things weighing heavily on the mining sector,” he says.
As is the case with the construction equipment sector, the biggest negative factor is the reduction in stocks at the dealer level.  

As with the other two sectors, the farm side of things is also declining. “John Deere’s farm business for their first quarter for the U.S. was down 4.9 percent, which is fairly modest compared to other markets, and worldwide their sales were down 4.3 percent,” says Plummer. “If you look at the actual output of farm equipment unit sales, that was down 7.6 percent year-to-date. It was down 15.6 percent for March itself vs. a year ago. So that’s showing, unfortunately, a trend of a steeper decline as we move forward beyond the numbers.”
Plummer says the Trump administration’s tariffs have affected farm equipment makers. In addition, “the retaliation by the Chinese has been quite severe in the U.S. agricultural sector, causing crop prices and sales to decline.” This may adversely affect farmers’ willingness to spend money for new equipment.
However, there is also optimism. “The new trade agreement the Trump administration had signed with China has a heavy component on the agricultural side,” says Plummer. China has been bypassing U.S. ag products for several years, even before the pandemic. But in the new agreement, China will be obligated to buy a sizable amount of agricultural goods from the U.S. every year.

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